E CENTRAL PREPARATORY SCHOOL^ 

20 E. 42d St., Ng:\.v Yor;^, N. Y 




I'l^KSENTKI) UY 



TV ^ f\ 




c^ 



, f X. 



FIRST PRINCIPLES 



OP 



POLITICAL ECONOMY. 



CONCISELY PRESENTED 



FOR THE USE OF CLASSES m HIGH SCHOOLS 
AND ACADEMIES, 



BY 

AARON L. CHAPIN, D.D., 

FBKSIDEKT OF BELOIT COLL£G£. 



BUTLER, SHELDON & COMPANY 

IfEW YORK, PHILADELPHIA, CHICAGO 



HBi7/ 

.5 

.C-17 



FIRST PRINCIPLES 

OF 

POLITICAL EOOIsrOMT. 

One volume. 16mo. 225 pages. 

Concisely presented for High Schools and Academies, by Aaron Ij. 
Chapin, D.D., President of Beloit College. 



II. 

WAYLAND'S ELEMENTS 

OF 

POLITICAL ECONOMY. 



Recast, and revised by Aabon L. Chapin, President of Beloit College. 

FOJi COLLEGE USE. 

One volume. 12mo. 425 pages. 



Out 2 l^2B 

Copyright, 1879, 
Bt SHELDON & CO. 

4 



PEEFAOE. 



From several quarters, there came a call for a concisa 
compend of the principles of Political Economy, which 
could be used as a text-book for advanced classes in 
high schools and academies. In this little book, the 
author has attempted to respond to that call. He has 
not tried to make a book for children, nor to make the 
science easy for youth of more maturity; but he has 
endeavored simply and clearly, in as few words as possi- 
ble, to present the subject for the study of persons who 
have learned something of the power of language, and 
have been trained to think and reason for themselves. 

The " Exercises" thrown in all along are not intended 
to furnish teachers with questions on the text. Every 
one fit to teach this and kindred subjects will frame his 
own questions best. But they are designed, like the 
problems in arithmetic or algebra, to suggest practical 
applications of the principles and topics of discussion 
which will introduce some diversity of opinions, and 
extend the range of the subject somewhat beyond the 
Umits of the text-book. 

The book is a condensed presentation of the matter 

iii 



/ 



ZV PREFACE. 

contained in the larger work recently issued as a modifi- 
cation of Wayland's Elements of Political Economy ; and, 
for a fuller treatment of the topics noticed, reference is 
made to that book. It is desirable that every teacher 
should also have at hand for reference one ar more other 
works of prominent writers such as those of Adam 
Smith, McCulloch, Mill, Pawcett, Thornton, and Jevons, 
of England ; Roscher of Germany (an excellent transla- 
tion of which has recently appeared) ; and those of 
Bowen, Perry, Carey, Thompson, Bascom, A. Walker, 
F. A. Walker, Sumner, and D. A. Wells, of our own 
country. 

Generally the author's aim has been to give a cleat 
statement of principles, avoiding the advocacy of one 
side or the other of disputed questions. In the last 
chapter, however, positive opinions are expressed on the 
issue between protection and free trade, partly as an 
example of the application of principles to pending 
questions, and partly to indicate the present strong drift 
of both philosophical and practical economists on that 
question. If it shall serve to elicit opposite views for 
full discussion in the class-room, the author's aim will 
be best accomplished; for it is his earnest hope that 
this introduction of this important branch of science to 
the study of our schools may tend to a more intelligent 
apprehension of economic laws on the part of our peQ< 
pie generally. ^^ 

Beloit College, Jan. 1, 1880. 



COITTEI^fTS. 



mXRODUCTION. 
DEFINITIONS AND DIVISIONS. 

PAGB 

Political Economy defined ...... 6 

Fundamental truths. 
Wealth defined 6 

Sources of wealth, original, secondary. 

How increased. 
Value defined 7 

Its maximum and minimum limits. 

Divisions of the Science .8 

exehcises 10 

PART I. 

PRODUCTION. 
Thbeefold Subdivision 11 

CHAPTER I. 

section i. — of labor. 

Labor defined 1\ 

Kinds of labor : 1. Physical labor. 2. Mental labor. 

What physical labor does. 

"What mental labor does directly : 1. Discovery. 2. Inven- 
tion. 3. Oversight. 

Mental labor indirectly concerned in production. 
CELiNGES effected BY LABOR 13 

1. Transmutation. 2. Transformation. 3. Transportation. 
Exercises 16 

V 



vi CONTENTS. 

SECTION II. — MEANS FOB INCREASING THE EFFECl, 
IVENESS OF LABOR. 

Agents of Nature most available .... Id 
Animal power, sunlight, gravitation, wind, steam, gunpow- 
der, &c., electricity and galvanism, chemical forces. 

Agents for directing Power 17 

How Natural Agents make Labor Effective . . 18 

Division of Labor defined 19 

It implies analysis and distribution of parts. 
Advantages of Dia^ision of Labor . . . .20 
1. Shortens apprenticeship. 2. Saves time. 3. Increases 
dexterity. 4. Suggests inventions. 5. Employs diverse 
capacities. 
Exercises .21 

section iii. — labor in great manufacturing 
establishments. 

"What such Establishments require .... 23 
1. Large capital. 2. Many laborers. 3. Rapid production. 

4. Wide markets. 6. Executive ability in superintend- 
ence ; in finances. 

Why not set up at once in a New Country? . . 24 

How THEY promote THE GrENERAL "WELFARE . . 25 

1. They multiply and clieapen products. 2. Increase variety 
of ■gratifications. 3. Favor certain employment for 
laborers. 4. Balance different branches of industry. 
Evils incident to Division of Labor . . . . 2f 
1. Endangers physical health. 2. Dwarfs minds. 3. Im- 
pairs independence. 4. Risk of sweeping disaster. 

5. Fosters jealousies and antagonisms. 

Exercises 28 

CHAPTER IL 

of capital. 
Capital defined 30 

Mistakes corrected : 1. Capital not synonymous with wealth. 
2. Nor with money. 3. Does not include hiunan quali- 
ties. 
Origin op Capital, the Fruit of Labor saved . .32 

Forms of Capital .33 

1. Implements and machinery. 2. Materials. 3. Means of 
subsistence. 4. Finished products. 

Consumption op Capital .34 

Destruction passing on all its forms. 



CONTENTS. Vii 

Proditctive and Unproductive Capitaii ... 36 
Fixed and Circulating Capital . . . . . 36 
Exercises . . . .37 

CHAPTER III. 

THE CO-OPERATION OF LABOR AND CAPITAL. 

Labor and Capital Partners 3d 

Most harmoniously united in one person. 

Why this cannot be Universal 39 

1. Capital tends to increase. 2. Men's tastes differ. 3. Large 

establishments necessary to some forms of production. 

Conditions which favor the Union of Capital and 

Labor 41 

1. General distribution of capital. 2. Ratio of capital to 
number of laborers. 3. Assurance of just reward to 
each. This depends on, a, division of property; 
b, just laws ; c, freedom to both capital and labor. 
4. Intellectual and moral culture. 
Exercises 43 

PART n. 

CONSUMPTION. 
The Nature of Consumption . , .... 45 
Kinds of Consumption 46 

CHAPTER L 

INVOLTJNTABY CONSUMPTION. 

Natural Consumption ....... 46 

Accidental Consumption 47 

What insurance does. 

Immaterial and Notional Consumption ... 48 

Exercises « • . 48 

CHAPTER IL 

voluntary CONSUMPTION. 

Two Objects, Reproduction, Gratification . . 50 

section i. — consumption for reproduction. 

The Rule of Economy , . 51 

For capital : a. Use no more than necessary, b, Use the 

cheapest possible, c, Exhaust all utilities. 
For labor: a, Use no more than is needed, b. Use labor 

adapted to the purpose, c, See that the labor is per» 

formed. 



vm CONTENTS. 

Careful Study of Processes essential to Economy, 63 
Bestrictions on either Labor or Capital against 

Economy 53 

Economy promotes the General Welfare ... 53 

Exercises 54 

section II. — consumption for gratification. 

Kinds of Gratification 55 

1. Those which preserve health and life. 2. Those which 
delight the senses. 3. Intellectual gratifications. 4. So- 
cial gratifications. 5. Moral gratifications. 
The Rule of Economy applicable to all ... 57 
a, Consume only the needed amount, b, Make consumption 
perfect, c, Select carefully the gratifications. 
The Reciprocal Relation of Consumption and Pro- 
duction 58 

Extreme frugality and extreme luxury to he avoided. 
Exercises .60 

CHAPTER in. 

public consumption. 

The Nature of Public Consumption . r. . 61 

The Purposes to which it is applied .... 62 

1. For support of government. 2. For public ^toprovements. 

3. To advance science, and difiiise intelligence. 4. For 

popular education. 5. For care of afflicted classes. 

6. To relieve poverty. 7. For a nation's defence. 

Two Rules of Economy in Public Consumption . 65 

Exercises 65 

PART in. 

DISTRIBUTION. 

Distribution defined 67 

The Parties to be recognized 67 

Laborers, owners of capital, the government. 

Subdivisions 68 

CHAPTER I. 

the remuneration of labor. 

Terms used, Wages, Salaries, Commissions, Fees . 69 

section I. — nominal and real wages. 
The Distinction between Nominal and Real Wages, 70 



CONTENTS. U 

Causes of the Difference ..*... 7C 
1. Money fluctuations. 2. Forms of payment. 3. Regular- 
ity of employment. 4. Duration of power to labor. 

section ii. — the efficiency of labor. 

The Distinction between Nominal and Real Cost 

OF Labor 72 

Causes of Difference of Efficiency .... 73 
1. Race-qualities, 2. Diet and clothing. 8. Personal habits. 
4. Degree of intelligence. 5. Technical education. 
6. Cheerfulness. 
Exercises 74 

section III. — considerations which deter- 
mine THE rate of wages. 

Wages imply a Contract 76 

Considerations which determine the Rate . . 76 
1. Cost of living, necessary wages, 2. Value of the prod- 
ucts, maximum limit, 3, Custom, 4. Competition, 
most influential of all. 5. The Golden Rule. 
Combinations to resist Competition .... 8(1 

Strikes, trades-unions, combinations of employers. 
Exercises .84 

section IV. — causes OF variation in thb 
remuneration OF labor. 

Circumstances affecting Cobipetition . . . « 85 
1. Ease or difficulty of the employment. 2. Skill required. 
3. Trust involved. 4. Constancy of employment 
6. Probability of success. 
Salaries, Commissions, and Fees .... 87 
Labor so compensated involves : 1. Superior natural gifts. 
2. Personal character. 
Extraordinary Compensation in Learned Profes- 
sions 88 

. 89 
. 89 
. 90 
. 90 



The Case of Authors and Artists 
Offices of Honor, Clergymen, and Scientists 
Remun^bration for Women's Labor 
Reasons why it is less than that of Men. 

1. Physical and mental constitution, 2. Home sphere. 
3. Prospective marriage. 4. The actual organization 
of industry. 5. Feminine instincts. 6. Partial sup- 
port from friends. 

The Case of Woihen of Genius 92 



X CONTENTS. 

Conclusions 98 

a. Absolute equality unattainable, b, Present inequality 
unreasonable, c, How relief is to come, d, Woman 
queen in the home. 

Exercises , , , 9\ 

CHAPTER II. 

THE REMUNERATION OF CAPITAL. 

The Justice op Remuneration for CAPiTAii • , 95 
Threefold Subdivision ..;..;• 96 

section I. — RENT. 

Kent defined . . 97 

Bent of Agricultural Lands 97 

Productiveness depends on Fertility and Situation, 97 

Rent of City Property depends on Location . . 98 

Why Rents rate less than Interest .... 98 

Exercises 99 

section n. — interest and dividends. 

Interest defined 10(1 

The Term implies a Mutual Advantage . . . 101 

Interest on Capital not Wrongful Usury , . 102 

Circumstances which determine Rates of Interest, 102 

1. Risk, depending on : a, personal character ; b, character 

of the business; c, character of the government. 2. 

Convenience of the investment : a, facility of transfer; 

5, permanency; c, punctuality in payment of interest. 

3. The profits of industry. 4. Ratio of demand to 

supply of capital. 
Why Interest is High in a New Country. . . 106 

Usury Laws explained 106 

Why Usury Laws are Unreasonable . . . . 106 
1. They violate a right of property. 2. Civil law cannot fix 

prices. 3. The price of capital most variable. 4. These 

laws increase burdens. 5. Such laws never enforced. 
pIVXDENDS DEFINED 108 

They depend on success of industry. Thsy include interest 
and profits. 
Exercises 109 

CHAPTER IIL 
distribution of profits. 

]|?R0FITS DEFINED . , , lU 



CONTENTS. :d 

Items of Expense to be deducted from Proceeds . m 

1. Wages. 2. Salaries. 3. Interest. 4. Insurance. 5. Taxes. 

Percentage on Capital not a True Measure op 

Profits 112 

Three Mebibers of the Partnership to be recog- 
nized 113 

Capital, executive agency, labor. 

A Fair Distribution of Profits harmonizes Labor 
AND Capital . . ,,,,.. 114 

Co-operative Associations • . . . . = 115 

Exercises 116 

CHAPTER IV. 

revenues of the government. 

The Claims of Governihent take Precedence op 

other Claims 118 

Taxation, the Maxim of Free Government . . 119 

Adam Smith's Maxims 119 

Direct and Indirect Taxation 120 

Tariffs defined 121 

Duties, Specific and Ad Valorem 121 

National and State Taxation in the United States, 122 

National Taxes 123 

a, Excises, b, Stamps, c. Licenses, d, Income tax. 

State Taxation, how imposed 125 

Equitable Taxation should reach All Kinds op 

Property 126 

Liability to Double Taxation 126 

Exercises 127 

PART IV. 

EXCHANGE. 
Importance op this Department 129 

CHAPTER I. 
nature, necessity, and agents of exchange. 

Exchange defined 130 

Value the Central Term 131 

The Law of Supply and Demand 131 

Three Classes of Commodities 131 

1. Things which cannot be multiplied. 2. Things easily 
multiplied. 3. Things multiplied at extraordiiuury ooat» 



xil CONTENTS, 

Fundamental Principles stated by Mill . 138 

1. Value a relative term. 2. Market value depends on sup- 
ply and demand. 3. Cost defines natural value. 4. The 
natural value of some things a scarcity value. 5. Things 
that have a scarcity value not easily increased. 6. A 
monopoly value is a scarcity value. 7. The natural 
value of an article equals the cost value of the most 
costly portion. 8. The condition of stable equilibrium 
in exchange is that things exchange at their cost value 

Necessity of Exchais^ge « 

Between individuals ; between nations. 

The Agents of Exchange 

Merchants, Retailers, Middle-Men . . • 

Factors, jobbers, shipping-merchants, iuporters, bankers 
brokers, underwriters. 

Outgoing and Incoming Currents of Trade • 

Exercises 



134 

136 
137 



138 
140 



CHAPTEK 11. 

MONEY AN INSTEUMENT OF EXCHANGE. 
ItaFFICULTIES OF EXCHANGE BY BARTER .... 143 

Money defined 14i 

section i. — the functions of money. 

Money as a Standard of Value 144 

Money as a Medium of Exchange 145 

Essential Qualities of Money 146 

1. Stability of value. 2. Universal acceptableness. 3. Di- 
visibility without loss of value. 
One Substance should fulfil both Functions . . 147 
Money not necessary as a Medium of Every Ex- 
change 147 

Every Thing comes to have its Price .... 148 

Articles used as Money ....... 148 

Uniformity of Money throughout the "World de- 
sirable 149 

Exercises 150 

section ii. — specie. 
Qualities which fit Gold and Silver for Money 153 

1. They have intrinsic utility. 2. They cost labor. 3. They 
concentrate great value in small bulk. 4. They are 
divisible without loss. 5. They are of uniform quality. 
6. They can be easily verified. 7. They are indestruo» 
tible. 8. They are adapted to each other. 



CONTENTS. Xiii 

liBGiriMATE Agency of Goverjtsient respectinq 
Money .... 153 

1. To name a legal tender. 2. To regulate coinage. 
Things to be regarded in Coinage .... 156 
1. Quality of the metal. 2. Size of coins. 3. Form of coins. 

Seigniorage 157 

What may be done with Worn Coins and Foreign 

Coins. . . 158 

The Question of a Double Standard . . . .159 

Gold for main standard, silver as subsidiary. 
General Truths respecting Money .... 160 
1. The cost of money equals the cost of the article exchanged 
for it. 2. Freedom of commerce equalizes the supply 
of money. 3. The amount of money small in propor- 
tion to exchanges made. 4. Increase of money in a 
country not of itself advantageous. 5. Abundance of 
money not an index of prosperity. 6. A false maxim 
refuted. 

Exercises 162 

CHAPTER III. 
credit an instrument of exchange. 

Credit defined 164 

section i. — the forms of credit. 
The Leading Forms in which Credit appears . . 165 
1. Book-accounts. 2. Loans. 3. Mercantile paper. 4. Bank- 
deposits. 5. Stocks. 6. Bonds. 7. Circulating notes. 

section 11. — the useful functions of credit. 

Mistakes corrected 167 

Credit is not capital, — does not create capital. 

Borrower and lender cannot use the same capital at once. 
The Useful Functions of Credit stated . . . 168 

1. It brings wealth into use as capital. 2. It draws out in- 
dustrial talent. 3. It quickens exchanges. 4. It is a 
direct instrument of exchange between individuals, 
between distant cities, between nations. 5. It may be 
put into paper-money. 

SECTION III. — THE ABUSES OF CREDIT. 

Some Abuses of Credit stated 1T3 

1. Too freely granted. 2. By wild speculations of borrow- 
ers. 3. By extravagant living of debtors. 4. By con- 
fidence-operations. 5. By betrayal of trusts. 6. By 
over-estimate of asseta. 7. By excessive iasue of paper- 
money. 



Xiv CONTENTS. 

Mischiefs causbd by these Abuses . . . .174 
a, Fluctuating prices ; b. Honest men pay for bad debts ; 
c, Trade made a game of chance ; d, Moral sense dead- 
ened ; e, Force of contracts relaxed. 

Exercises 175 

CHAPTER IV. 

BANKS AND PAPER-MONEY. 

Banks, Agents of Credit • I7l 

section i. — offices of banks. 

Four Offices of Banks 178 

1. To collect and keep money-deposits. 2. To negotiate 
money-exchanges, — peculiarity of British exchange. 

3. To make loans and discounts. 4. To issue circulate 
ing notes. 

section ii. — the united-states national- 
bank system. 

Main Features of the Law . . • • • • 182 

The Liabilities of National Banks . . . .184 

1. The capital stock. 2. Circulating notes. 3. Deposits. 

4. Balances due other banks. 5. Surplus funds and 
issues. 6. Undivided profits. 7. Miscellaneous lia- 
bilities. 

The Resources of National Banks .... 185 
1. Loans. 2. United-States bonds to protect circulation. 3. 
Bonds and stocks held as investments. 4. Balances 
due from other banks. 5. Real estate. 6. Exchanges 
and cash items. 7. Currency. 8. Funds to redeem 
circulation. 9. Miscellaneous items. 

The Sources of Profits op Banks .... 185 
1. Interest: a, on United-States bonds; b, on circulating 
notes ; c, on capital and reserves ; d, on deposits loaned. 
2. Premiums on exchange. 3. Commissions for col- 
lections. 

Private Banking Houses and Savings Banks . . 186 

section hi. -^PAPER-MONEY. 

Distinction between Paper-money and Money-paper, 187 

Kinds of Paper-money 183 

1. Mercantile currency. 2. National-bank currency. 3. 
Mixed currency. 4. Credit currency. 5. Paper-money 
seciu'ed by real estate. 



CONTENTS. XV 

Characteristics op Paper-money .... 19(1 

1. Convenient. 2. Economical. 3. Involves always credit. 
4. Can never serve as a standard of value. 5. Can cir- 
culate only in the country -where it is issued. 6. Liable 
to fluctuations. 7. Causes prices to fluctuate. 8. Gov- 
ernments tempted to issue it without limit. 9. Mad^e a 
legal tender, it is a forced loan. 10. A cause of panics. 
11. Tends to make commerce a game of chance. 12. 
Blunts the public conscience. 
Exercises 19ft 

CHAPTER Y. 
international trade. 

fukdamentai. propositions 19s 

1. All nations of one blood. 2. Earth and its resources 
given to the one human race. 3. Earth's resources 
best developed when each country produces that for 
which it is best adapted. 4. Earth's blessings best dis- 
tributed by free mutual exchanges. 
New Facilities for Intercommunication welcomed . 196 
False Doctrines formerly prevalent on Inter- 
national Trade 197 

The Theories of Protection and Free Trade dis- 
tinctly STATED 198 

Arguments for Protection considered . . . 199 
1. Protection necessary to Varied Industry . . 199 
Varied industry admitted to be a blessing, a, Every coun- 
try has varied resources; b, also diversity of talent; 
c, men have diverse wants ; d, varied industry makes 
a home-market; e, it favors social and moral advance- 
ment. 
But Protection is not necessary to Varied Indus- 
try 201 

a, Industry has a natural growth, b, Free competition the 
healthy stimulus to that growth, c, Varied industry 
springs up as fast as increase of labor and capital war- 
rant, d, The instinct for accumulation a safe gu..-i. 
e, Artificial stimulus produces re-action. /, Foreign 
products are purchased with fruits of most eflfective 
labor, g, Foreign competition cannot crush natural 
growth. A, Artificial nursing makes a sickly growth. 
Pit)tection cannot add to natural resources, nor create capi- 
tal, nor create men of skill. It can only change the 
direction of capital and labor. 



xvJ CONTENTS. 

2. Protection maintains National Independence . 204 
Two kinds of independence. Protection fosters independ- 
ence of isolation. 
8. AORICULTURAIi PRODUCTS NEED A HOME-MARKET . 206 

Free trade the condition of a healthy home-market. 
Positive Objections to Protection .... 208 
1. It fosters antagonism of industries. 2. It leads to over- 
production. 3. It reduces revenues of the State. 4. It 
is an unstable policy. 5. It demoralizes legislation. ^ 

6. It corrupts public morals. ' 

The Experiment of Free Trade between our 

States 210 

The Golden Eule applicable to Nations . . . 211 
KxEBCisi;^ •••oo»«*.f. 212 



INTRODUCTION. 



DEFINITIONS AND DIVISIONS. 

Political Economy is the science which shows 
how things intended to satisfy our wants are pro- 
duced, and how they are consumed ; how they are 
distributed among a people, and how they are ex» 
changed one for another all over the world. 

The science springs from four fundamental truths : 

1. God has made men creatures of many wants, 
and filled the world in which they live with means 
for satisfying those wants. 

2. The labor of men is necessary to draw out the 
materials of nature, and to fit them for use in meet- 
ing men's wants. 

3. The exertion of labor establishes for the laborer 
a right of property in the things which he produces. 

4. The right of propert}' implies the right of ex- 
change or sale, and diversity of labor necessitates 
between men exchanges of the fruits of their labor. 

Three desires in men contend for the master}' : — 

1. Desire of ease. This tends to repress labor. 

2. Desire of present gratification. This tends to 
consume the fruits of labor at once. 

6 



6 POLITICAL ECONOMY. 

3. Desire of means for future gratifications. Thia 
tends to stimulate labor, and to save its fruits. 

A man or a nation grows rich onlj- as the third of 
these desires overrules the other two. 

Wealtll is the collective name for all useful things 
which can be owned and exchanged. Some things 
are very useful, jxt they form no part of wealth, 
because they cannot be exclusivel}" appropriated. 
Such are air, sunlight, and commonly water. Other 
things, such as bread, salt, cloth, iron, houses, &c., 
are capable both of satisfjang wants, and of being 
exclusively possessed and exchanged. Only these 
are properly accounted wealth. 

The original source of wealth is the bounty of God 
in nature. 

The secondary source of wealth is human labor 
directed to bring forth the bounty of nature in 
form, in time, and in place, to meet the w^ants of 
men. 

Wealth is increased only by constant reproduction, 
i.e., by destroying some useful articles to bring forth 
others. Thus the wheat that is sown must die, in 
order that a new crop ma}^ spring from it, 3ielding 
thirty, sixt}", or a hundred fold : the leather in the 
hide must be cut up to make shoes, in which form it 
meets wants. If a man consumes all his wheat, he 
will have none to sow. The tanner prepares his 
leather, expecting it to be used up for shoes. Ab- 
stinence and foresight attend all productive labor. 
Thus industry and frugality are indispensable con- 
ditions of the increase of wealth. 



INTRODUCTION. 7 

Value is purchasing power, or that quality in an 
object which gives it power to command other objects 
in exchange. The term supposes alwa3^s a compari- 
son of two objects with reference to an exchange. 
Thus vahie is a relative, not an absolute, qualit3\ 

Two things are combined in this qualit}' of value, 
— first, utility, that is, adaptedness to satisfj^ want 
or gratify desire ; second, cost, that is, some labor 
necessar}^ to produce the object. We can think of 
nothing which has greater utility than air and light ; 
but the}' have no value, because the}" are so freely 
supplied to all that they cost no labor. If one has 
spent a day's labor in making a table, he will not 
give it to his neighbor for air or light which he can 
have for nothing ; nor will he exchange it for a box 
which he could make with half a day's labor. So, 
in general, the value of an article is determined very 
much by the labor which it costs to produce or pro- 
cure it. Things are exchanged at what is called 
their natural value, when the terms are adjusted by 
the relative cost, labor for labor. 

The utility of an object is its desirableness for 
gratification. This may Aary with circumstances, 
such as individual taste, the fashion of the day, the 
emergency of the hour, &c. To one who cannot 
read, a book will have no use ; for his own gratifica- 
tion he will give nothing for it. One will readily 
give a gold watch for a loaf of bread when there is 
no other means of saving him from starvation ; then 
the value, the purchasing power, of the loaf, rises a 
thousand-fold above its actual cost. 

These two elements thus define the extreme limits 



8 POLITICAL ECONOMY. 

of value. The most one will give for an object is 
determined by his estimate of its utility, or the 
gratification it will afford him. The least a man 
will ordinaril}^ take for an object is determined by 
its cost, or the labor necessar}^ to produce it. 

Between these limits value may temporarily fluc- 
tuate, as the relations of supply and demand vary. 
When the supply of an object is small, and many 
persons desire it, the purchasing power of that ob- 
ject is increased by competition among the buj^ers. 
When a larger quantity of an article has been pro- 
duced than is wanted, the purchasing power of that 
article is diminished by competition among the sell- 
ers. But this state of things, in either case, will 
not continue long ; for free competition tends always 
to settle the value of all things upon the natural 
basis of cost. 

Divisions. — Political economy treats of the pro- 
duction of things to satisfy wants. Hence the two 
leading divisions of the science are Production and 
Consumption. 

Production is the process of labor applied to ob- 
jects of nature to adapt them to the satisfaction 
of wants. We can neither create nor annihilate an}^ 
part of matter ; but we can modif}'" almost every .^ 
thing s© as to impart to it some utilit}^, — that is, 
we can create value. Under this division, therefore, 
are considered the processes and laws by which 
labor gives value to things. The substances thus 
brought out are called products. 

Consumption is the act of destioyuig utilities 



INTRODUCTION. 9 

either for immediate gratifications, or to produce 
some new utilit}' for future gratifications. The 
actual destruction of values is necessaril}'^ involved. 
Under this division are considered the laws which 
govern the economical use of w^ealth to satisfy w^ants 
or gratify desires. 

There are among men great diversities of capacit}- 
for labor. It is therefore good economy of produc- 
tive effort to unite the labors of many persons on a 
particular product, so that each may contribute the 
part which he can do best. Yet each person has a 
variet}^ of wants, while his own labor is devoted to 
one thing. He must therefore get what he needs in 
exchange for what he makes. Hence arise two other 
branches of our science, logicall}' subordinate to those 
just mentioned, though practicall}' of the highest im- 
portance. They are Distribution and Exchange. 

Distribution embraces questions of equity and 
practical methods pertaining to the assignment to 
different laborers of their respective shares of values 
produced. Here are considered the difficult problems 
gi'owing out of the mutual relations of emplo3ers 
and emploj'ed. 

Exchange is the act of transferring things from 
one to another, according to their values. Each 
individual is busied in creating one utilit}', and 
wants a thousand. Each countr}' produces of cer- 
tain articles far more than it needs, and needs 
many others which it cannot produce at all. Hence 
the necessity of universal and ceaseless exchange. 
Under this division are considered the instruments, 



XO POLITICAL ECONOMT. 

the laws, and the processes, which relate to the 
mutual transfer of values. 

The most difficult problems of political economy 
belong to the departments of distribution and ex- 
change. 

EXERCISES. 

1. Mention some articles of wealth. 

2. Tell what you know of the manner in which they are 
produced. 

3. Name what you can of the utilities of each. 

4. Do savages, or civilized men, have the most wants? 

Why? 

5. Why has air no value ? 

6. When and wliy may water have value ? 

7. How does iron exist in nature ? 

8. State what you cau of the processes of labor which 
render iron useful. 

9. If a farmer gives a hushel of wheat for a razor, why 
is it a fair hargain ? 

10. Whence comes the great value of the diamond ? 

11. Why does the value of an article decline as it goes out 
of fashion ? 

12. What events in Europe may enhance the value of the 
American farmer's wheat-crop ? Why ? 

13. Why has cotton less value than wool ? 

14. What different kinds of labor are represented in a yard 
of calico? 

15. How are the ten cents paid for that yard of calico 
distributed to the several parties who have labored to pro- 
duce it ? 

16. How docs a merchant's labor add value to the goods 
he sells ? 

17. Why are strawberries and peaches generally cheapest 
in the market Saturday afternoon ? 

IS. How does foreign commerce benefit our agriculturists 
and manufacturers ? 

19. How do railroads help to develop the wealth of a 
country ? 



POLITICAL ECONOMY. 



PART I. 

PRODUCTION. 

Production is the process of drawing out means 
to satisfy human wants b}' labor appUed to natural 
objects. Labor is the first essential. Some prod- 
ucts of former labor are also requisite to begin with. 
To these the name Capital is given. This branch 
of political econom}^ will therefore be best presented 
under three subdivisions. The first will treat of 
Labor, the second of Capital, and the third of the 
co-operation of these two factors. 



CHAPTER I. 

SECTION L— OF LABOR. 

Labor is the voluntary exertion of human beings 
put forth to attain some desired object. 

The processes of production give scope for the 
exercise of all the faculties of man. Hence two 
kinds of labor are to be recognized : — 

1. Physical labor, in which muscular exertion is 
the chief thing. 11 



12 POLITICAL ECONOMY. 

2. Mental labor, which engages chiefly the facul- 
ties of the mind. 

All productive industry combines some phj^sical 
and some mental effort. Even the day-laborer must 
exercise his mind to handle his shovel with judg- 
ment and skill. In general, labor is effective in 
proportion as it is directed by intelligent mind. 

Physical labor only moves things. It depends on 
the capacity of living muscle to contract and ex- 
pand, as governed by the will. But this power to 
produce motion under the control of intelligent mind 
gives man unlimited command over the forces of 
nature to acliieve his purposes. 

Mental labor is directly concerned in the produc- 
tion of wealth in three wajs : — 

1. In investigation to discover the properties and 
laws of matter. So chemical research made known 
the substance phosphorus, and its propertj' of start- 
ing into flame under friction. 

2. In invention to devise methods and instru- 
ments by which the properties of matter ma}^ be 
made to meet human wants. So matches were in- 
vented, — a very simple instrument, by which phos- 
phorus is used to kindle our fires. So the spinning- 
■ jenny and the power-loom were devised to facilitate 
and cheapen the process of making cloth. 

3. In oversight and superintendence. In the sim- 
plest kinds of labor, mind must direct muscle. 
Where numbers are joined in labor for a given 
product, one ingenious mind, superintending, gives 
effect to the muscular exertions of a score of igno- 
rant workers. 



OF LABOR. 13 

It Is obvious, that, in the wide range of produc- 
tive industr}^, mental labor is quite as essential as 
physical labor. Whatever, therefore, quickens the 
mental activity and promotes the inteUigence of a 
^opie, tends to the increase of their wealth. 

Mental labor is also indirectly instrumental in 
production, as it is applied to improve the phj^sical 
health and the mental capacity of individuals, and 
to maintain order, justice, and security in human 
societ}^ Here belong the mother's care in nursing 
and training children ; the teacher's labor to de- 
velop the minds of 3'outh ; the lawj^er's counsel and 
pleadings to define and maintain the rights and ob- 
ligations of men under the rule of civil law ; the 
minister's efforts, by the truths and precepts of 
God's word, to form good consciences, and improve 
the public moral sense ; and the varied services of 
legislators and officers of government to insure sta- 
bility and order in the very structure of society. 
Though these labors do not directl}^ bring forth 
material products, they favor all the productive 
industr}^ of a people, and are as essential to the 
best results of its processes as the manual labor of 
the farmer or the blacksmith. 

The Changes eflfected by Labor applied to 
matter may all be reduced to three, which are indi- 
cated by the three words, Transmutation, Transfor- 
mation, and Transportation. 

1. Transmutation is a change in the elementary 
form of matter. So, by the labor of the farmer, 
carbon, gases, and water are changed into wheat; 



14 POLITICAL ECONOMY. 

by that of the chemist, acids and alkalies are 
.changed into salts ; by that of the tanner, skins 
and tannin are changed into leather. 

2. Transformation is a change in the aggregate 
form of matt;er. The shoemaker transforms a hide 
of leather into shoes ; the smith transforms a piece 
of iron into a horse-shoe ; the spinner transforms a 
bale of cotton into thread, and the weaver trans- 
forms the thread into cloth. 

3. Transportation is a change in the place of mat- 
ter, as when a cargo of wheat is transported by ship 
from New York to Liverpool, or ten tons of dry 
goods are transported by rail-car from New York to 
Chicago. 

In a general wa}^ these changes represent respee- 
'ivelj^^ the agricultural, the mechanical, and the com- 
mercial departments of human industry ; and each 
contributes an important element of utility. He 
who makes the flour, and he who transports it to 
the people who need it, render as important services 
for the satisfaction of wants as the farmer who raises 
the wheat. These divers forms of labor stimulate 
and support each other. 

These several forms of labor enter in different 
degrees into the value of different articles. Thus 
butchers' meat and green vegetables derive most of 
their value from transmutation ; clothing, cutlery, 
&c., derive the greater part of their value from 
transformation ; and the value of bulky articles like 
coal is determined very much by the cost of trans- 
portation. In most articles, however, we see more 
or less of all these forms of labor combined. By 



OF LABOR. 15 

new devices and increased facilities for either of 
these forms of labor, production is enlarged and 
improved, and comforts are multiplied. 

EXERCISES. 

1. What is the difference between labor and play ? 

2. What is sldll ? 

3. How are man's muscle and mind and a force of nature 
combined in driving a nail ? 

4. What kinds of labor produced the magnetic tele- 
graph ? 

5. How does that invention aid production ? 

G. What services do the chemist and pattern-drawer in a 
calico-mill render ? 

7. How is the payment of a high salary to the manager 
of a cotton-mill good economy ? 

8. How is production favored by the brain-work of stu- 
dents of science, of inventors, of lawyers, of teachers, of 
legislators, judges, and magistrates? 

9. If you buy a pocket-knife for fifty cents, how many 
and what forms of labor does the price represent ? 

10. How do good roads favor production ? 

11. How do the operations of thieves and swindlers affect 
production ? 

12. Do gamblers and speculators contribute to the increase 
of wealth ? 

13. How does the prevalence of drunkenness affect the 
industry of a community ? 

14. Are men who labor in the learned professions fitly 
called non-producers ? 



16 POLITICAL ECONOMY. 



SECTION II. — MEANS FOR INCREASING THE 
EFFECTIVENESS OF LABOR. 

Economy of labor is an important consideration 
in the increase of wealth. Man's phj^sical power is 
limited, and his strength is soon exhausted. But 
there are forces of nature which are stronger than 
he, and some of which never tire. These he can 
bring into his service, and so at the same time re- 
lieve the burden and multiply the products of his 
labor. 

There is also great difference in the capacities of 
different men. Some have strong muscles and dull 
minds. Others have strong minds in weak bodies. 
Some are specially fitted for one kind of labor, and 
others for another. The fruits of labor will there- 
fore be increased, if man}^ join hands under a sys- 
tematic arrangement which sets every one to doing 
the particular work for which he is best fitted. 

There are thus two wa3^s in which the effective- 
ness of hum.an labor ma}^ be increased : — 

First, b}" devices for employing the agents an 
forces of nature. 

Second, b}^ a S3'stematic division of labor. 

1. The agents and forces of nature most available 
for production are : — 

a. The muscular power and instincts of animals. 

h. The light and heat of the sun. 

c. The force of gravitation, especially in falling 
water. 



EFFECTIVENESS OF LABOR. 17 

d. Moving currents of wind. 

e. The expansive force of steam. 

/. The explosive force of gunpowder, dynamite. 
&c. 

g. The attractions and repulsions of electricit}* 
and galvanism. 

h. The action of chemical forces. 

To these we must add, for combining and direct- 
ing all kinds of forces, the mechanical principles or 
powers ; viz., the lever, the pulley, the inclined plane, 
the wheel and axle, the wedge, and the screw. 

The properties of matter embodied in these agents 
are the gift of God, and of themselves cost us noth- 
ing. But in most cases, to make them available, 
some instrument must be employed which has cost 
labor. Thus, to control animal power, we need 
yoke or harness, cart or wagon, &c. ; a lens enables 
us to intensify the light and heat of the sun ; by 
means of a water-wheel or pendulum we command 
the force of gravitation ; by a wind-wheel we catch 
the force of moving air ; by a steam-engine we ac- 
cumulate and direct the expansive force of steam ; 
by a hammer we combine the principle of the lever 
with the force of gravitation and the density of 
steel ; and the complicated machinery of a cotton- 
mill is but an adjustment of various means to the 
great purpose of phj'sical labor, which we have seen 
to be to produce and direct motion. 

These instruments, when simple, like a hammer, a 
spade, a plane, are called tools. When complicated, 
like a fanning-mill, a spinning-jenny, or a steam- 
engine, they are called machines. Some instruments 



18 POLITICAL ECONOMY. 

are required in every kind of labor, for Iniman 
limbs and muscles and brains unassisted can accom- 
plish but little. The inventions of the last fifty 
3'ears have introduced elaborate machinery' into all 
branches of industry. One man with a pair of 
horses, a plough, a drill, and a cultivator, can culti- 
vate ten times as much land as he could with only a 
spade and hoe. 

This use of natural agents increases the effective 
ness of labor in two wa3's : — 

First, it enables one man to do the work which 
must otherwise require a number of persons, and so 
either sets free a portion of labor for other occupa- 
tions, or greatly multiplies and cheapens products. 

Second, it achieves what no amount of labor un. 
assisted could perform. So the telegraph-machine 
is a means of instantaneous communication between 
places a thousand miles apart ; the locomotive can 
propel a train of cars at the rate of forty or sixt}' 
miles an hour ; a screw-machine will turn out screws 
by the million, with a uniformity and nicet}^ of finish 
which could not be attained by hand-work. 

The great benefit thus realized is in multipl3ing 
the means of satisfying human wants, and bringing 
them within the reach of all classes of people; An 
incidental disadvantage is, that, with the introduc- 
tion of labor-saving machiner}', man}^ persons are 
thrown, at least temporarily, out of emplo^'ment, or 
are compelled to learn new methods of labor. It 
involves also the danger of over-production in cer- 
tain articles, and of a general disturbance of the 
harmonious relations of difterent branches of Indus- 



EFFECTIVENESS OF LABOR. 19 

try. Nevertheless the good results far outweigh the 
evil ; and we ma}' hope that the problem, now before 
the world, of adjusting the S3stem of labor to the 
new condition of things, will soon find a happy 
solution, which shall be equitable and advantageous 
to all. 

2. Division of Labor applied to production 
means that different kinds of labor be distributed to 
different individuals and classes so that all shall do 
that for which they are best fitted. 

The principle is illustrated on a broad scale in 
the peculiar industries of different countries adapted 
to their respective advantages. Thus tea is a spe- 
cial product of China, cotton of our" Southern States, 
cutlery of England, silk goods of France and Italy. 

In all civilized communities people take up differ- 
ent trades and professions according to their several 
capacities, tastes, and circumstances. The results 
of labor are both increased and improved when the 
farmer and the baker, the blacksmith and the jew- 
eller, the weaver and the tailor, the merchant, the 
law3-er, the doctor, &c., each devotes his energies 
to the work of his particular calling. This order of 
things marks the chief difference between savage 
and civilized life. 

But as a technical term of political econom}', divis- 
ion of labor has a more specific apphcation to labor 
employed on particular products. Suppose, for ex- 
ample, an establishment for the manufacture of 
t\'atches is projected. The watch is made up of 
many different parts. Obviously it will economize 



20 POLITICAL ECONOMY. 

labor to assign each part to one man or set of men. 
Thus the wise apphcation of the principle involves 
two things : — 

1. An analysis of the article to be produced, and 
of the work to be done, into distinct and simple 
parts. 

2. A distribution of these parts to the persons 
employed, so that each workman shall coimne him- 
self as nearly as possible to a single operation. 

The system is complete when the several opera- 
tions keep each other going, — when there are no 
superfluous hands, and none are kept idle waiting 
on others' movements, — when the several processes 
fit into each other like the gearing of smooth-running 
machiner3^ 

The special advantages of division of labor 
ma}^ be stated as follows : — 

1. It shortens the period requisite for one to 
become an expert workman. It is quite evident that 
one operation can be learned more quickly and more 
perfectly than ten or twenty. 

2. It saves the time which w^ould be lost in pass- 
ing from one kind of w^ork to another. By the law 
of habit, an operation often repeated becomes easy 
mind and muscle adapt themselves to one form of 
labor, and acquire a capacity for continued exertion. 
It will take some time to " get brain and hand in " 
to another operation. Where complicated tools must 
be adjusted to different kinds of work, this consid- 
eration is of more importance. " Time is mone}^'' 
said Franklin. This is especiall}' true in all matters 
concerning the production of wealth. 



EFFECTIVENESS OF LABOE. 21 

3. It Increases the dexterity of the workmen. 

Repeated "practice makes perfect." The mind, 
the e3'e, the hand, are trained to quickness and 
precision by the repetition of a single operation. 
In a boiler-factor}^ the rapidity and precision with 
which the man plies his hammer to form the rivet- 
heads is wonderful. He has acquired this dexterity 
by devoting himself to this single operation. 

4. Division of labor suggests the contrivance of 
tools to facilitate operations. Many of our most 
valuable inventions have originated with workmen 
whose attention was devoted to particular processes. 
New improvements are thus continuallj'' brought 
forward. 

5. Division of labor brings into most profitablft 
service all diversities of talent and capacity. In the 
manufacture of fine glass-ware, one part of the 
process requires high artistic genius ; another, judg- 
ment and skill, the fruit of experience ; another, ful- 
ness and strength of lungs ; and others, the simplest 
forms of manual labor. It were poor economy to 
set a raw hand to engrave a delicate pattern, or 
to send the artist to carry the vessels from the fur- 
nace to the annealing-oven. B}' sj'stematic arrange- 
ment each can be kept doing that for which he i* 
fcest fitted, and for which he receives wages accord- 
ing to its importance. 

EXERCISES. 

1. How much can a man do for himself without any 
tools? 

2. What force of nature does the Indian's bow bring 
into service? 



22 rOLITICAL ECONOMY. 

3. Is there any definable limit to man's dominion ovei 
other animals and the forces of nature ? 

4. Name the animals which have been subdued to serve 
man. 

5. Name as many as you can of the useful inventions of 
the present century. 

• 6. What natural agent does the mariner's compass ren- 
der available, and for what purpose ? 

7. What natural agents are employed in photography, 
and by what means ? 

8. On what agencies of nature do the agricultural crops 
depend ? 

9. What is the function of the great balance-w-heel in a 
mill for rolling iron ? 

10. By what principles is the power of a slowly-moving 
water-wheel distributed to a hundred whirling spindles ? 

11. "Wliat natural agents and what mechanical powers 
does an axe combine ? 

12. Mention some of the purposes to which the natural 
ageni heat is applied. 

18. Why are inanimate forces preferable to animal power ? 

14. State the comparative advantages of water-power and 
steam-power. 

15. Give an illustration of the principle of division of 
abor, and how it increases the effectiveness of labor. 

1(5. State the various kinds of labor involved in making a 
pair of shoes. 

17. Suppose a man works alone at shoemaking, doing all 
the parts himself, how can he economize his labor? 

18. Why do shoes made in a wholesale way in a factory 
cost less than shoes made to order ? 

^ 19. How does the division of labor affect the employment 
of women and children ? 

20. How does it develop and employ the highest talent ? 

21. Do the use of machinery and the division of labor 
make labor more, or less, respectable ? 



MANUFACTURING ESTABLISHMENTS. 28 



SECTION III. — LABOR IN GREAT MANUFAC- 
TURING ESTABLISHMENTS. 

The two means for increasing the productivenesa 
of labor, treated of in the previous section, are so 
mutually related that the one involves the other. 
The use of labor-saving machinery unites many per- 
sons in the same process of production, and necessi- 
tates the distribution of the parts of the process. 
On the other hand, the division of labor to an}' great 
extent is ordinarily impracticable, except in connec- 
tion with the use of machinery. Both tend to the 
setting-up of large establishments, in which the full 
benefit of these means of increased productiveness 
is realized. 

For their successful operation, these establish- 
ments require 

1. Large investments of capital in machinery, 
buildings, &c. 

2. Large numbers of laborers, of different grades, 
under one general management. 

3. The rapid production of articles in great quan- 
tities. 

4. An extensive market for the disposal of the 
products. 

5. Great executive ability of two kinds, — 

a. In the superintendence of the mechanical pro- 
fesses . 

h. In the general financial management of pur- 
chases and sales, credits, collections, and sharjj 
competitions on a large scale. 



24 POLITICAL ECONOMY. 

The application of the two principles msiy be said 
to be limited by these several considerations. In a 
new country there is little accumulation of either 
wealth or i^opulation : the demand for particular 
articles is small ; facilities for transportation, which 
would widen the market, are few ; and the first 
emigrants, though 3'oung and energetic, have yet 
to develop mutual confidence and high executive 
abihty. Hence labor begins with each man's doing 
by himself all kinds of work with few and simple 
tools. But in due time diverse industry is devel- 
oped as naturally as a tree grows. As wealth is 
accumulated, and population increases, new wants 
arise, and new means of satisfying them are provided. 
As roads and bridges are made, and railway's push 
themselves on, the market is widened, enterprise is 
stimulated, talents are brought forward, and great 
establishments are set up for production on a large 
scale. Such a natural growth is far more healthy 
and sound than the premature development which 
comes from forced, artificial appliances. 

When a large establishment has been started, a 
deficiency in either of the five particulars named may 
prove disastrous. If the funds at conmaand are all 
put into what the English call " the plant," the 
enterprise may fail for lack of working capital ; o.' 
skilled laborers may be scarce ; or the products maj 
be diminished through insuflacient or unfit material; 
or, on the contrary, the products may be in excess 
of the demand, with no provision for enlarging the 
market. Most disastrous of all is the lack of ex- 
ecutive ability and wisdom in either the detailed 



MANUFACTURING ESTABLISHMENTS. 25 

processes of the manufacture, or the general ad- 
ministration of the business. 

When, however, these conditions are fulfilled, by 
a harmonious combination of all the elements in due 
proportion, the highest efficiency of labor is attained. 
The general welfare is thus greatly promoted in 
several waj's. 

1. Primarily and chiefly, products are multiplied 
and cheapened. The large establishment economizes 
labor, as appears in what was said of division of 
labor. It economizes materials, saving ever}^ item 
of utilit}^ in the scraps and odds and ends which in 
production on a small scale would be thrown awa}'. 
Thus, in the large packing-houses, the hoofs, the 
horns, the bones, even the blood and refuse matter, 
of the animals slaughtered, are utilized. It econo- 
mizes supervision also ; one man of brains being able 
to oversee and direct the operations of five hundred 
or a thousand workmen easil}' and effectively. As a 
consequence, the cost of articles is reduced, so that 
thousands instead of hundreds of people can afford 
to use them. Thus the great cotton-factories have 
brought down the cost of common muslin from fift}'' 
cents to six cents per 3'ard, and all classes of people 
can use it freely and abundantty. 

2. Production on a large scale tends to increase 
the variety of objects which minister gratifications. 
How many new and beautiful fabrics made of cot- 
ton have the great factories given to the world ! 
The article caoutchouc, called India-rubber formerl}', 
because its only known use was to rub out pencil- 
marks, is now brought out from large establishments 



26 POLITICAL ECONOMY. 

for working it, in a hundred forms, adapted to ren- 
der most important services. The concentration of 
labor quickens invention. 

3. Such organization of labor increases the cer- 
tainty of the steady employment of laborers. On the 
first introduction of labor-saving machiner}^, work- 
men have been often thrown into a panic lest they 
should lose emplo^-ment ; but almost invariably, 
under the augmented production and reduced cost, 
the demand is so extended that the labor required 
is increased, instead of being diminished. Thus the 
actual condition of the English weavers was greatly 
improved by the introduction of the power-loom. 
Notwithstanding occasional fluctuations consequent 
on over-production and financial revulsions, the ten- 
dency of large manufacturing establishments is to 
insure constancy of employment to laborers of all 
grades. 

4. This system of large productive operations 
helps to maintain a proper balance between different 
branches of industry. Increased production in one 
department stimulates activity in every other, both 
by the example of success, and by an actual demand 
for other products, to meet the various wants of 
large numbers of people gathered. So, gradually, 
the use of machinery and the division of labor are 
combined in large establishments for making all 
"kinds of articles, from friction-matches to 'x)como- 
tive-engines ; and some common interest** bind al] 
together. 



MANUFACTURING ESTABLISHMENTS. 27 

Certain evils incident to the minute divis- 
ion of labor in large establishments must also be 
noticed. 

1. There is danger that the physical health and 
vigor of laborers will be impaired. There is more 
or less involved, long and close confinement to a 
single operation, which overtasks one limb or set of 
muscles, in a posture which cramps and oppresses 
the vital organs, under exposure to deleterious gases 
and exhalations, and to the breathing of air bereft 
of oxygen, and charged with carbonic acid. There 
are also strong temptations to the confinement and 
excessive labor of children not full-grown, and to the 
overtasking of women, unfitting them to be healthy 
mothers. The vital statistics of large manufactur- 
ing towns present painful facts illustrating this evil. 

2. There is danger that the mind will be contracted 
and enfeebled. When one's attention and energies 
are absorbed for ten hours each day in sharpening 
pins or counting buttons b}' a machine, his soul must 
be cramped, and its development hindered, unless 
special means are taken to counteract the tendency. 

3. The division of labor involves some loss of in- 
dependence and self-respect. The number of those 
who manage business for themselves is diminished ; 
and men dependent on v/ages lack something of that 
manliness of character which is gained under the 
responsibility of a business of their own. 

4. When a large establishment faiis, it involves a 
sweeping disastei-. The fate of great numbers of 
workmen hangs on the wisdom of one manager. 
Thus the mischiefs of a general financial crisis are 
aggravated. 



28 POLITICAL ECONOMY. 

5. Mutual susjvicions, jealousies, and antagonisms 
are fostered in large manufacturing establishments. 
The natural inequality of men is increased. Some 
chafe under subordination to others ; and one rest- 
less, jealous spirit may disturb the cheerful labor 
of hundreds. On the other hand, the possession of 
power prompts some emploj'ers and managers to an 
imperious disregard of the rights of those under 
them. 

These evils are to be recognized, yet they are not 
incurable. By many manufacturing companies spe- 
cial pains are taken to counteract them, with favor- 
able results. We may hope for reUef to come from 
the present agitation of the labor-question, and from 
whatever measures promote intelligence and foster 
the sentiments of justice and good-will. 

EXERCISES. 

^ 1. Describe any large mauufacturhig establishment you 
may have visited. 

2. What natural agents are brought into use by its 
macliinery ? 

3. How many persons are employed in it, and how is 
the work distributed among them ? 

4. How much are the articles produced improved and 
cheapened ? 

5. Where do these articles find a market ? 

6. What special qualities has the superintendent ? 

7. Wliat is the condition of a people who have no 
machinery or division of labor ? 

8. Is it luxuries, or necessaries, that are most produce^ 
In large manufactories ? 

9. Is it the rich, or the poor, who are most benefited by 
the reduced cost of manufactures ? 

10. Is it wise, or foolish, for the laborers in Mexico tQ 



MANUFACTURING ESTABLISHMENT^. 29 

c.estrov reapers and other labor-saving agricultural ma- 
chinery introduced ? Why ? 

11. Will the setting-up of a large factory in your town 
affect laborers favorably, or unfavorably ? Why ? 
1/" 12. Why are laws needed to regulate the employment of 
children in factories ? 

13. How may the danger to the health of laborers in 
factories be relieved ? 

14. What can be done to save minds from being dwarfed ? 

15. Must one necessarily sacrifice a proper spirit of inde- 
pendence and self-respect by becoming an employe in such 
an establishment ? 

16. What is the effect of successful enterprise in on6 
branch of industry on all others ? 



30 POLITICAL ECONOMY. 



CHAPTER II. 

OF CAPITAL. 

Its Definition. Capital is that part of wealth 
which is employed, or designed to be employed, in 
production. Since this word is used vaguely, we 
need to adhere to a strict definition. Let us notice 
two or three mistakes which tend to confuse ideas 
on this subject. 

1. Capital is not synonymous with w^ealth. All 
capital is wealth ; but all wealth is not capital. Sup- 
pose a farmer's crop this year gives him a hundred 
bushels of wheat to spare.. He ma\' lay it up in his* 
granary for his own future use ; or he may sell it for 
gold, and bury the gold for safe keeping ; or he may 
spend the gold for a fine picture with which to adorn 
his parlor. In either case it is a part of his wealth ; 
but since, in either case, it will do nothing to increase 
his next 3'ear^s crop or income, it is not capital. If, 
however, he exchanges his surplus wheat for a horse, 
or spends the avails of it on labor to clear and drain 
his fields, or bu3's with it a share of stock in a 
flouring-mill, he turns this part of his wealth into 
capital. His wheat is gone, or the money is gone; 
but in the horse, or the improved land, or the share 
in the mill, it is to work out for him more wealth 
next year. 



OP CAPITAL. 31 

2. Capital is not synonymous with money. Monej? 
buried in the ground 2)roduces nothing. A man 
intending to start a woolen-mill may need first to 
turn some of his propert}' into mane}' witli which 
to pa}' for buildings, machiner}', &c. His fifty thou' 
sand dollars deposited in the bank for this purpose 
is his prospective capital ; but it will not become 
for him actual capital till it is paid out for a build- 
ing, a water-wheel, spinning-jennies, and power- 
looms. When his establishment is complete, his 
money wi 1 be all gone ; but now he has his capital 
all ready for service. Mone}- in circulation is an 
instrument of exchange, and so performs an impor- 
tant function for all productive industr}^ ; but it is 
just a wheelbarrow to pass things from one to 
another. The confusion of ideas comes from the 
fact that capital, and indeed all wealth, is estimated 
in terms of mone}- ; but in reality only a small por- 
tion of an individual's or a nation's capital is in the 
form of money ; and alYva3's the quality of monej^ is 
of far more consequence than its quantity. 

3. Capital does not properly include human 
qualities, such as strength, skill, judgment, energ}^, 
integrit}''. These are often spoken of loosely as a 
part of capital. Certainly they are very important 
elements of production, and are the result of pre- 
vious productive eflbrt ; but they are qualities of 
labor, and SO, in the distinctions of our science, are 
more properly classed under that head, as we have 
seen. 

Varying the form of our definition a little in view 
of these mistakes, we may say Capital includes all 



82 POLITICAL ECONOMY. 

material products devoted to purposes ot further 
production. 

The Origin of CapitaL Capital is always tli« 
fruit of past labor saved. A farmer's boy onoe 
received as the first wages of his labor a ewe- 
Iamb. He might have sold the lamb, and spent 
the avails on his immediate gratification ; but he 
chose to keep it, and care for her and her 3'oung. 
The clip of wool and the natural increase from year 
to year were in like manner saved, till he came into 
possession of a valuable flock ; then he sold the 
flock, and with the avails commenced business as 
A merchant. Thus the first-fruit of his labor saved 
became the nucleus of a capital which fostered the 
industries of two continents. Such is universall}^ the 
origin and growth of capital. It begins in saving, 
and grows by the continued exercise of industry 
and frugality. The first step of the savage towards 
civilization is to learn forethought and self-denial. 

In this aspect of the matter, capital is simply pas* 
lahor embodied, and reserved for present labor to 
work with. Hence we see that labor and capital 
are not so diverse as many suppose. In nature 
they are akin, and indispensable to each other iu 
the processes of production ; always combined for a 
common end. They are set in antagonism to each 
other only through a popular sentiment, or an or- 
ganization of society radically false and wrong. 

Forms of CapitaL The products of previous 
labor appear as capital in many and varied forms^ 
but all may be grouped under foui^ heads : — 



OF CAPITAL. 38 

1. Implements and machinery by -which present 

tabor is made effective. Here are included the cart, 
the plough, the divers tools, machines, and useful 
and laboring animals of the farmer ; the ax, the 
plane, the awl, and the hammer of the mechanic ; 
the engines and various machinery of the manufac* 
turer ; and the wagon, the ship, the railway and its 
rolling-stock for the transportation of goods. To 
this categor}' belong also the land and its improve- 
ments b}' drainage, irrigation, fences or hedges, &c., 
and buildings for barns, workshops, storehouses, and 
manufactories. To all of this the general term 
Fixed Capital is often applied. With the activity 
of invention, and the multiplication of machinery-, 
the amount of capital in this form becomes very 
large. 

2. Materials to which present labor is to be applied. 
Under this head may be set down the farmer's seed 
and manure ; the manufacturer's raw materials, such 
as lumber, cotton, iron, wool, leather, &c. ; his sec- 
ondary materials, such as 3'arn, steel, gold-leaf, &c. ; 
and his auxiliary materials, such as coal for raising 
steam, chlorine for bleaching, acids, alkalies, and 
dye-stuffs for coloring. All these come with values, 
as the products of former labor, to have their values 
increased b}' new transformation under present labor. 

3. Means of subsistence for laborers. Men must 
have food and clothing and shelter while the}' work. 
This must come from previous labor, as the crops of 
last 3'ear sustain the farmer and his help while this 
year's crops are maturing. Under this head must 
be embraced dwelling-houses, as well as all kinds of 



34 POLITICAL ECONOMY. 

provisions and apparel needful for the support and 
comfort of families. In large establishments the 
provision made for salaries and wages covers all 
these items. 

4. Finished products waiting for a market. The 
process of production is not completed till the prod- 
ucts pass from the producer's hands. A farmer 
may not choose to dispose of his crop as soon as it 
is gathered. At certain seasons, the manufacturer 
may be compelled to accumulate a large stock of his 
goods, in readiness for a brisk sale when the market 
ope*is. For the time, the crop, or the stock o\ 
goods, absorbs a portion of capital. This necessity 
is incident to every line of productive industry, and 
allowance must be made for it in providing capital 
for the business. 

In civilized society, something in these forms of 
capital is essential to every kind of production. 
The blacksmith who works by himself must have 
forge and anvil, hammer and tongs, for instruments 5 
some iron for material ; a home, with some rtore of 
clothing and food, for his subsistence j and a few 
finished horseshoes hanging in his window, ready 
for the first call. And the capital of a great cotton- 
factory, though counted by millions, may all be 
resolved into these four forms. 

Tile Consumption of Capital. Though capital 
is the fruit of saving, jot it is the fixed law of pro- 
duction that labor applied to capital destroys value of 
one kind in order to bring fortli a 8ui>erior value ot 
another kind. 



OF CAPITAL. 85 

This change is passing on capital \n each of its 
forms. The instruments slowly and surely wear 
away by use, the materials are imiXiCdiately de- 
stro3'ed, food is rapidly consumed, c;otliing more 
slowly, and the house more gradually still, but none 
the less surely ; and the finished product; sold is lost 
to the producer, to appear again in nev» implements, 
new materials, new means of subsistence, and new 
products. Thus is the unceasing roun i of values 
destroyed for the sake of greater valui'S produced. 
The difference between the value consutoed and the 
value produced is the profit, — the end steadily 
aimed at. It matters not in what foim the value 
re-appears, provided only it is greater than that 
destro3'ed. If a value is destroyed to produce 
another only equal to it, we lose our labor. If a 
value is destro3'ed, and nothing is re^produced, we 
lose both labor and capital. Individuals and nations 
grow rich onl}' as the value created is superior to 
the value of both the labor and capital *;onsumed. 

Mr. Mill sa3's, " The greater part, in value, of the 
wealth now existing in Eingland, has been produced 
b}^ human hands within the last twelv« months. A 
very small proportion indeed of that large aggre- 
gate was in existence ten 3'ears ago ; of the i:)resent 
productive capital of the country', scari^elj' an}- part 
except farm-houses and a few ships aud machines ; 
and even these would not, in most cases, have sur- 
vived so long, if fresh labor had not been emplo^-ed 
»vithin that period in putting them in r.2pair. Capi- 
tal is kept in existence from age to age, like popula 
tion, not by preservation, but by reproduction." 



86 POLITICAL ECONOMY. 

Productive and Unproductive Capital. By 

our definition, all capital is, or is designed to be, 
productive. Wealth that is not productive is not 
capital. But capital is sometimes unprofitably in- 
vested, as in a mill or a railwaj' abandoned. Some- 
times in a financial revulsion, or in consequence ot 
over-production, the business of a great factor}^ is 
suspended. In these cases, for the time, capital is 
unproductive. Then it loses its ordinary profit; 
and, besides, machinery unemploj'ed generally suf- 
fers damage quite as fast as when running. Sound 
economy requires that capital be constantly joined 
with labor, and so made productive. 

Fixed and Circulating Capital. We notice 
these as terms quite commonly used ; but the dis- 
tinction they indicate is neither verj^ important nor 
very accurately defined. In general, fixed capital 
means little more than land, buildings for both busi- 
ness and dwellings, tools, and machiner3\ Circu- 
lating capital means finished products in passage 
from producers to customers. Thus fixed capital 
brings out its fruits in circulating capital. And 
since, in prosperous production, the values produced 
are greater than those consumed, the surplus of cir 
culating capital is very naturally turned into fixed 
capital for enlarged operations. A particular article 
may be set down under the one head or the other, 
according to its relations. A plctigh, for instance, 
in the plough-factor}-, just finished, or in the handa 
of the merchant, is circulating capital ; held by tha 
farmer for use, it is a part of his fixed capital. 



OF CAPITAL. 37 

Money, though it circulates more freely than any 
thing else, must be classed with fixed capital. It 
is an instrument of exchange, which, like a wagon, 
a ship, or a locomotive, runs to and fro continually, 
only to move other things. 



EXERCISES. 

1. Is a workman's coat an item of capital ? How is it 
with his Sunday suit ? 

2. Is money deposited in a bank for safe-keeping merely 
capital to the depositor ? What if the banker loans that 
money to a manufacturer ? 

3. When may a piano-forte be regarded as an item of 
capital ? 

4. Suppose a man has great skill as an engraver, but no 
plates nor tools to employ his skill. Is his skill capital ? 
Can the plates be made productive capital without the skill ? 

5. Do the savings of a miser increase capital ? 

6. What risks are involved in putting one's savings into 
capital ? 

7. What is the ultimate effect of extravagant living on 
production ? 

8. If a seamstress pays for a sewing-machine out of 
her earnings, what does the machine represent ? What 
advantage does it yield ? 

9. Illustrate the forms of capital in the case of a 
cabinet-maker working by himself. 

10. Illustrate the same point in any large factory with 
which you are familiar. 

11. What capital is necessary for a wood-chopper who 
works by the day ? 

12. If the Pacific Mills pay each week six thousand dol- 
lars wages, what items of capital does the sum represent ? 

13. What items of capital appear in the annual inventory 
of a shoe-factory ? 

14. How is the capital consumed in the yearly wear of 
machinery replaced ? In estimating profits, what allowance 
(uust be made for this ? 



38 POLITICAL ECONOMY. 

15. A farmer paid five hundred dollars for stock in a 
railway running near his farm. The subsequent sale of 
the road under foreclosure of bonds made the stock worth- 
less. But the facilities of the road add ten cents a bushel 
to the price at which he sells his wheat. Is the capital 
which he put into the railroad productive, or unproductive ? 

16. When is a threshing-machine fixed, and when circu« 
Jating capital ? 



CO-OPEKATION OF LABOR AND CAPITAL. 3S 



CHAPTER III. 

THE CO-OPERATION OF LABOR AND CAPITaI*. 

In the processes of production, Labor and 
Capital are Partners, Co-ad jutors for a com- 
mon end. Sharers in a joint result. Each is ne- 
cessary to the other ; each is helpless without the 
other. The most stalwart man can produce nothing 
without food and clothing, tools and materials, — » 
the fruit of previous labor, i.e., capital. Facto- 
ries filled with ingenious machinery, warehouses 
full of cotton, stores of finished goods, capital in 
whatever form or amount, can do nothing to in- 
crease itself. Thus labor and capital are the two 
necessary and inseparable factors in the production 
of wealth. 

For their co-operation these elements meet mosl 
harmoniously in the same person ; that is, when the 
laborer owns capital enough to employ his own 
labor. Then one will, one self-interest, controls 
both, and jealousy is excluded. But this adjust' 
ment cannot be universal, for three reasons : — 

1. Capital under the application of labor tends to 
increase, so that the man soon finds in his hands a 
surplus, to emplo}^ which he must seek another, who 
has only labor, to work under him. Thus a distint 



40 POLITICAL ECONOMY. 

tion between laborer and capitalist, emploj'er and 
emplo^'ed, is sure to rise. 

2. The great diversity of capacities and tastes 
among men necessitates a separation into two 
classes. Often the man strongest, and most skilful 
for labor, has no tact to manage business, and save 
its returns. On the other hand, men of great finan- 
cial ability are not infrequently phj'sically weak, and 
unfit for manual toil. 

3. Certain forms of production must be carried on 
in large establishments, where are combined large 
amounts of capital and great numbers of laborers. 
The advantages of machiner}" and the division of 
labor can be secured in no other wa}^ Some things, 
iike ships and locomotives, can be made only by 
such combinations ; and even such things as pins, 
buttons, and matches are most economically pro- 
duced on a large scale. 

Thus the two factors are separated : the capital 
falls to some persons, and the capacity to labor to 
others. The abstract equality and mutual depend- 
ence of the two factors is disturbed, jealousies 
spring up, and short-sighted self-interest produces 
antagonism between them. As the parties meet to 
enter into contract, the capitalist has the advantage, 
because he has something which he can live on ; 
while the laborer must work, or starve. The capital- 
ist is tempted to use his advantage ; and the con- 
sciousness of dependence makes the laborer sensitive^ 
and suspicious of wrong. Against their own true 
interests, the parties are led thus to array themselves 
against each other. 



CO-OPERATION OF LABOR AND CAPITAL. 41 

Conditions on wliich the Harmonious Union 
and Effective Co-operation of Labor and Capital 
depend : — 

1. A general distribution of capital; that is, SUcU 
a condition of things, that the capital of a country 
is in many rather than few hands ; that laborers 
themselves shall have, or be encouraged to secure, 
some capital. All means which help laborers to 
save their earnings favor this condition. 

2. The ratio of the amount of capital to the number 
of laborers. It is a fundamental principle of Politi- 
cal Economy that industry is limited by capital, and 
ever}' increase of capital demands increase of labor. 
The grand regulator is free competition on either 
side, under which the tendency is towards an equi- 
librium -, for nature provides for the steady increase 
of both capital and labor in some definite proportion. 

3. The certainty that labor and capital shall each 
have its just reward. Nobody questions the right 
of the laborer to a reward for his toil. If we 
remember that capital is the fruit of past labor 
saved, the right of its owner to a reward for its use 
is equally plain. The reward of each must come 
from the product of their union. To insure tliis 
certainty of reward, certain things in the social 
organization are essential. 

a. There must be division of property, personal 
ownership in ever}' thing that can by labor be made 
an object of value, and appropriated. Without this, 
capital cannot be. The theory of communism is 
false to nature, and fatal to industr}'. 

b» A prevalent moral sentiment and just laws miust 



42 POLITICAL ECONOMY. 

give security to property-rights. These safeguarda 
are needed to prevent robbery and fraud b}- individ- 
uals, and to restrain governments from oppression. 

C. There is needed, for both capital and labor, 
perfect freedom, unrestricted by monopolies, or special 
legislation. The inherent right of every man to do 
what he will with his own, provided he do no wrong 
to his neighbor, is not to be questioned. Ordinaril}', 
each will judge best for himself as to the use he will 
make of both his labor and his capital. 

4. The general intellectual and moral culture of 
a people is an important condition of the effective 
co-operation of labor and capital. Intelligence in 
the laborer adds to his efRcienc3^ Honest}' and in- 
tegrity are of the highest consequence to the safe 
investment of capital. With reference to the co- 
operation of the two, it is important that both 
parties, as they meet, be able to take broad views 
of their common interests and mutual dependence. 
Harmon}' between the two requires mutual respect ; 
and the basis of this is self-respect on the part of 
each, which springs from a clear, intelligent under- 
standing of relations, rights, and privileges. Thus 
means for the general education of a people, and the 
culture of good consciences by all religious influ- 
ences, have an economical value which cannot be 
over-rated. 

There is reason to believe that laborers have some 
occasion to complain of hardships from the oppres- 
sion of capital ; 3'et the wrong is not all on one side. 
The agitation of questions at issue between the 
parties will do good, if it leads to a better under- 



CO-OPERATION OF LABOR AND CAPITAL. 43 

Ktanding and a controlling regard for their common 
interests. But measures which directly increase 
jealousy between them, organizations which contem- 
plate hostilit}' and violence, can only aggravate the 
evil, and work damage to both sides. Combinations 
on either side to rule out fair competition, and repress 
freedom of individual judgment and action, are 
positively and only mischievous. Whatever tends 
to increase the intelligence, and promote the thrift 
and independence, of laborers, is helpful to hearty 
and profitable co-operation. 

EXERCISES. 

1. Illustrate the partnership of labor and capital in the 
case of a blacksmith who owns his shop, tools, &c., and 
"Works by himself. 

2. Suppose, at the end of a year, the blacksmith has a 
surplus of earnings. How can he use it to extend his busi- 
ness? 

3. Explain the co-operation of labor and capital when 
he has a hired man working with him. 

4. How are labor and capital partners in a watch-factory, 
whose capital, valued at a hundred thousand dollars, is 
owned by a hundred stockholders, and employs a hundred 
hands ? 

5. In what ways might a laborer in such a factory turn 
his surplus earnings into capital ? 

6. Suppose a skilful workman, with little tact for mana- 
ging business, and a poor workman, with great executive 
ability. Is it best that each should attempt to run a small 
business of his own ? 

7. AVliich is best for a country, — to have its land, as in 
England, owned in large tracts by a few landlords, or to 
have it, as in our country, held in small farms owned by 
those who work them ? 

8. Wliat is the effect on industry of a social organizatiou 
which divides people into fixed classes, as rich and poor ? 



44 POLITICAL ECONOMY. 

9. Show how competition affects the union of capital 
with labor, when the laborers are few in proportion to the 
amount of capital, and vice versa. 

10. Does the world owe any man a living without labor ? 

11. If the property of a town were all held in common, 
bow would industry be affected ? 

12. How does the lack of division of property among the 
Indians hinder their civilization ? 

13. Can labor and capital meet in successful co-operation 
where the public sentiment tolerates fraud and robbery f 
Which party there suffers most ? 

14. Show the effect on capital and labor of an oppressive 
government, like that of Turkey. 

I/' 15. What are monopolies ? How do they interfere with 
the advantageous co-operation of labor and capital ? 

16. Suppose a government offers a bounty for the pro- 
duction of woollen goods. Who pays the bounty ? Is it 
just and equitable ? 

^' 17. Is it good policy, by bounties or high protective tariffs, 
to build up one branch of industry at the expense of ah 
others ? 

18. When labor is scarce, and the profit of production is 
large, can any combination of employers to keep down the 
wages of labor long succeed ? 

19. When there is no profit on the production of cotton- 
goods, can a strike on the part of the mill-hands prevent 
the reduction of wages ? 

X 20. What means do you think best adapted to promote 
justice, mutual confidence, and good-will between laborers 
and capitalist* ? 



CONSUMPTION. 45 



PART II. 

CONSUMPTION. 

The Nature of Consumption. All the pro^ 
cesses of political econom}^ contemplate actual 
gratifications as the ultimate end. This is the 
legitimate use of wealth. It can be attained only 
by consuming the results of production. Con- 
sumption is thus the counterpart of production, 
and in its widest signification it is simpl}- the de- 
struction of value. B}^ this is meant not the anni- 
hilation of material substances, but the extinction 
of particular forms of utility. Thus when bread 
is eaten, when a coat is worn out, when a tree is 
felled, when a hide of leather is cut up, the particu- 
lar utilitj^ which each possessed is destroj'cd. It is 
in the nature of things an established law, that we 
can neither create new values, nor gratif\' our desires, 
except b}^ the destruction of existing value. 

It is to be noted, however, that one act of con- 
sumption does not necessarily^ destro}' qll the utilities 
of an article. The linen of a worn-out shirt has 
still an important utilit}^ as material for the manu- 
facture of paper. From the ashes of burned wood 
may be extracted an alkali useful in making soap. 



46 POLITICAL ECONOMY. 

Hence economy in consumption requires effort to 
exhaust the utilities embodied in all objects. 

Kinds of Consumption. There are several ways 
in which values are destroyed by the extinction of 
utilit}^, all of which come within the range of our 
broad definition of consumption. Sound economy 
must make account of all. 

A general distinction is made as we speak of 
consumption as Involuntary or Voluntary ; i.e., as 
effected without or with direct design on the part of 
man. 



CHAPTER I. 
INYOLUNTAKY CONSUMPTION". 

Under this head three specifications may be named. 

1. Natural Consumption; that is, the waste of 
utilit}^, the destruction of value, which is the work 
of nature. All things tend to decay. Wood and 
vegetables rot, iron rusts, linen goods become mil- 
dewed, woolen goods and furs are moth-eaten, grain 
in store heats and spoils, flour turns sour, and all 
things in use, even gold and silver, insensibly wear 
away. To this head is to be referred also the 
destruction caused by locu ts, chinch-bugs, vermin, 
&c. " It is estimated that m England the destruc- 
tion caused by rats, mice, insects, &c., amounts to 
ten shillings an acre per year, equal to ten million 
pounds per annum." 

The degree of this kind of consumption varies 
with the climate of different regions. It appears in 



INVOLUNTARY CONSUMPTION. 47 

one form under the influence of heat, in another 
under the power of cold. It is most general and 
most rapid in tropical countries. It is most within 
the control of man in the Temperate Zone, but no 
part of the world and no form of wealth is wholly 
exempt from this liabilit3% 

Sound econom}' calls for prudent foresight and 
diligent labor to prevent as much as possible this 
kind of consumption. Yet, after the best that man 
can do, there will be much of waste and loss from 
this cause, which must be carefully taken into 
account in the estimate of wealth and in plans for 
its increase. 

2. Accidental ConsumptiOD, Under this head 
may be included those sudden calamities which carry 
sweeping destruction before them, proceeding some- 
times from the carelessness of men, sometimes from 
the unforeseen and inexplicable action of nature's 
forces. Such are great fires, railwa3'-collisions, 
steamboat-explosions, shipwrecks, floods and torna- 
does, earthquakes and volcanic eruptions, ava- 
lanches and land-slides. The annual destruction 
of values in these wa3's is ver}^ great. Wealth in 
every form and in all countries is more or less liable 
to be thus suddenl}' consumed. No human art or 
foresight is competent to prevent it altogether. 

To meet this liability various methods of insurance 
liave been adopted. But insurance cannot prevent 
the loss caused b}^ destructive accidents. It only 
velieves individuals b}^ distributing the loss when it 
Occurs. When a house is burned, the destruction 
of value is absolute ; the wealth of the community; 



48 POLITICAL ECONOMY. 

is by so much diminished. If it was insured, the 
impoverishment of the individual owner is prevented 
only bj' bringing many to share the damage. 

3. Immaterial and Notional Consumption. 

These terms are used by Roscher to indicate that 
decline of value which comes from lapse of time or 
change of fashion. Thus the chief value of a daily 
newspaper is gone when it is a week old, although 
in itself it is the same thing as on the day it was 
issued. So, too, all sorts of fanc3^-goods, six 
months after the}' are brought to market, lose a 
considerable part of their value by a change of 
fashion. If we remember that value is simply 
*' purchasing power," it is evident, that, in the light 
of our science, these causes effect a consumption 
which is as real as that which comes from the actual 
destruction of the articles. Manufacturers and mer- 
chants and consumers also must take this loss into 
account. 

This kind of consumption varies much in different 
nations, and with different classes of people. In 
Germany fashions change much less than in France. 
In some countries, while the aristocratic and wealthy 
classes change their dress with the fashion, the com 
mon people wear their clothes till thej' go to pieces. 
In general, this kind of consumption increases with 
the advance of civilization. 

EXERCISES. 

1. Illustrate tlie relation of consumption to production 
In a particular instance. 

2. Are all men producers ? Are all consumers ? 



INVOLUNTARY CONSUMPTION. 49 

3. Illustrate the definition of consumption by the ordi- 
nary expenses of a family. 

4. Can you think of any gratification which can be 
attained without some destruction of value ? 

5. When a barrel of flour is made into bread, what ia 
consumed ? 

6. When the bread is eaten, what other consumption 
takes place ? 

7. When a manufactory stands idle for six months, what 
kind of consiunption is involved ? 

8. Why is it good economy for a farmer to keep his tools 
and machines under cover when not in use ? 

9. The burning of Chicago created a great demand for 
labor and materials for rebuilding: was the loss occasioned 
by the fire thereby diminished ? 

10. A ship and cargo, worth together half a million dol- 
lars, were totally wrecked at sea; but thirty days after- 
ward insurance amounting to four-fifths of their value 
was paid to the owners. What was the total destruction 
of value involved, and on whom did the loss fall ? 

11. In Germany, military officers are required to wear 
buttons marked with the initials of the reigning sovereign : 
what special effect on the value of their uniforms must 
follow the emperor's death ? 

12. When and why is it good economy for a merchant 
to sell his fancy-goods at less than their cost ? 

^ 13. Which involves the greater consumption of ladies* 
dresses, actual wear, or change of fashion ? 

14. What is the effect of frequent changes of fashiou 
on production ? 



50 POLITICAL ECONOMY. 



CHAPTER II. 
VOLUNTAKY CONSUMPTION. 

There are two objects for which men of their own 
purpose destroy existing values. The one is the 
increase of wealth by reproduction; the other is 
immediate gratification. Reproductive consumption 
demands care, skill, and labor, while consumption 
for gratification ordinarily requires neither. Hence 
the former is more or less irksome ; the latter is a 
present joy. 

We can rarely use the same value for these two 
distinct and opposite purposes. One cannot eat 
his cake, and have it to sell for something else. A 
man cannot spend a hundred dollars for a social 
entertainment, and have the same monej- as capital 
in his business. On the other hand, the A^alue in- 
vested in tools and materials for production is not 
available for the supply of food for the table or fur- 
niture for the house. These two kinds of consump- 
tion may therefore be best presented in distinct 
sections. 



CONSUMPTION FOR REPEODUCTION. 51 



SECTION I. — CONSUMPTION FOR REPRODUCTION. 

In presenting the laws of production, it was shown 
that the creation of vakies requires a union of capi- 
tal and labor in which both are consumed. Sound 
economy respecting consumption for this object pre- 
scribes the general rule, that the destruction of value 
for the desired product be always the least which 
will meet the necessity. This rule is applicable to 
both capital and labor. 

As respects capital, the following suggestions are 
in point : — 

a. The amount of capital should be no greater 
than Is necessary. In cutting clotli for garments, 
leather for shoes, boards for furniture, &c., there is 
opportunity for great saving or great waste of ma- 
terials. In agriculture, sowing done by drilling 
saves much seed. Care in the selection and adjust- 
ment of tools and machinery may also do much to 
diminish the cost of products. It is unwise to 
emplo}' a steam-engine of a hundred horse-power, 
when only half that amount of power is needed ; or 
to use delicate cutting-tools for coarse work. 

h. The kind of capital employed should be of the 
lowest value that will accomplish the purpose. 
Straw is a cheaper material for paper than rags ; yet, 
for many purposes, paper made partly or whoily of 
straw serves well. Chemistry applied to the arts 
has introduced cheaper dye-stuffs for prints. Re- 
search and invention ai'e thus constantly economizing 



52 POLITICAL ECONOMY. 

the cost of production, and every manufacturer needs 
to avail himself of the fruits of such stud}?". 

The frequent adulteration of articles is an abuse 
of this principle. In such cases, the aim is to pass 
off goods, under false appearances, for what the}' 
are not ; which is simply fraud, never to be justified. 

C. Every utility of the substances employed in 
production should be exhausted. There are frag- 
ments which may be saved. Thus in the manufac^ 
ture of jewelry, the filings and sweepings of the 
workroom yield a considerable value. There are 
secondary utilities which may be developed, as the 
Tefuse of a large slaughter-house furnishes materials 
for soap, candles, and glue. Formerly the seed of 
the cotton-crop was mostl}^ thrown away ; now from 
the kernel large quantities of valuable oil are ex- 
tracted ; the oil-cake furnishes excellent food for 
cattle and sheep ; the hull of the seed yields soluble 
phosphate of lime and potash for manure ; and the 
spent hull makes a white and clean paper-stock. By 
realizing these new values the cost of producing 
cotton-fibre is reduced. 

A chief advantage of production on a large scale 
is, that it warrants different operations for develop- 
ing these minor utilities, which in small establish- 
ments are wasted. 

As respects labor, the rule of economy suggests 
three corresponding points : — 

a. The labor employed should be neither more 
nor less than will effect the intended result. A super* 
numerary laborer wastes both his own time and thai 



CONSUMPTION FOR REPRODUCTION. 53 

of others. A deficiency in tiie number of laborers 
tends to confusion, and precludes the most economi- 
cal division of labor. The great advantage of ma- 
chiner}' is not that it diminishes labor, but that it 
multiplies the products of a given amount of labor, 
and so economizes production. 

h. The grade of labor should be carefully adapted 
to different operations. All the advantages of ' •• di- 
vision of labor " come into account here. It is wise, 
when great skill is required, to emplo}^ a man of skill 
at high wages. It is unwise to put such a laborer 
upon work which can be as well done by an unskilled 
workman at less wages. 

C. Tlie labor paid for should be all performed. 
To secure this, efficient superintendence is all-essen- 
tial. " Time is mone}^" says the maxim. Certainly 
it is mone}- to him who pa3's money for it. Ever}^ 
^our paid for that is spent in idleness is so much 
finprofitable consumption, — an absolute loss. Good 
superintendence often makes all the difference be- 
tween success and failure in the conduct of busi- 
ness. 

From these considerations it is evident : — 

1. That the economical consumption of capital 
and labor depends chiefl}' on the careful study and 
accurate knowledge of the nature of the processea 
of production. 

2. That all restrictions on the freedom of capital 
and labor are opposed to econoni}' of production. 

3. Econom}^ of labor and capital in production 
promotes the general welfare, by saving from destruo* 



54 POLITICAL ECONOMY. 

tion much that may be made tributary to the satisfy- 
ing of human wants. 

EXERCISES. 

1. Illustrate the distinction, between consumption for 
reproduction, and coDsuraption for gratification. 

2. Suppose a man buys a piano-forte for $500, and then 
mortgages the piano for $300 with which to buy tools for 
his business. Does the same value serve the doable purpose . 
of gratification and reproduction ? 

3. Give examples of waste and saving in the material 
of production. 

4. How do contrivances for the more perfect consurap- 
tion of fuel in steam-engines favor production ? 

5. Name an article which has been both cheapened and 
improved by the use of cheaper materials. 

6. Is the use of barytes, instead of white-lead, for mak- 
ing paint, a legitimate economy ? 

7. Name an instance of a secondary utility secured by 
productive operations on a large scale. 

8. What is the consequence of employing five men on 
the work of four ? 

9. Is he always the most economical laborer who works 
for lowest wages ? 

10. What need of a foreman at high wages in each 
department of a cotton-factory ? 

11. Which is the best regulator of consumption for pro* 
dnction, prescriptive law, or free competition ? Why ? 

12. Would it be a blessing to either laborers or the conh 
munity if labor were restricted to eight hours a day ? 



CONSUMPTION FOR GRATIFICATION. 5^ 



SECTION II. — CONSUMPTION FOR GRATIFICA- 
TION. 

The ultimate end of all industr}- is to provide fov 
the wiviits of men, and to minister to their happiness. 
The products of industry" ma}- fitly be consumed on 
several kinds of gratification. 

1. Gratifications essential to the preservation of 
health and life. All men require food, clothing, and 
shelter. Hence these are called necessities. The 
term is, however, used relativelj^, not absolutel}'. 
The measure and qualit}' of goods needed in this 
form varies with circumstances, such as climate, 
grade of civilization, occupation, and social position, 
and also with the taste, temperament, and education 
of diff'erent persons. A bamboo hut, a measure of 
rice, and a few 3'ards of cotton cloth, suflSce for the 
pariah of India. A respectable citizen of our coun- 
try requires values a hundred-fold greater. 

2. Gratifications -which delight the senses and 
tastes. The mere sustaining of existence comes far 
short of filling out the measure of men's capacity 
for enjoyment. Such things as delicacies for the 
table, beautiful dress and equipage, ornamental fur- 
niture, the products of fine art in painting, statuar3% 
urchitecture, and music, public exhibitions to please 
the e3^e and the ear, yield rich gratifications to peo- 
ple of taste. The desires which run in this direction 
are natural. Their gratification, within due limits, 
IS refining and elevating. Means for these gratifica* 



56 POLITICAL ECONOMY. 

tions may be drawn from the resources of nature, 
and quite generall}^ distributed. It is morally and 
socially healthful for people of ever}^ class to enjoy 
some things which they esteem luxuries. 

At the same time, there are in this direction dan- 
gers to be carefully avoided. Appetites unnaturally 
formed and unduly pampered maj' gain the mastery, 
and lead to indulgences which produce miser}^ instead 
of happiness. These things may minister only to a 
desire for vain ostentation, which breeds discontent, 
envyings, and jealousies, — the bane of happiness. 
And men are sometimes led b}' a refined taste into 
ruinous extravagance, which exhausts their means, 
and robs them of even the necessaries of life. Self- 
control and prudent forethought should ever regulate 
both the desires and their gratification. 

3. Intellectual gratifications, from fit exercise of 
Ihe mind and the acquisition of knowledge. These 
aflfect the higher part of men's nature, and 3ield a 
pleasure exceedingl}' rich and pure, with a consump- 
tion of values comparatively small. All are capable 
of enjo^^ment in some degree from this source, and 
the capacity for it increases as provision for it is 
enlarged. 

4. Social gratifications, through the exercise of 
hospitality and all acts of friendliness, in the varied 
contact of men with one another. By the constitu- 
tion of our nature we are formed for mutual inter- 
course and fellowship, and through the good-will 
which seeks to please others we find a rich gratifica- 
tion for ourselves. Such gratifications bind society 
by strong and healthful ties, and promote the general 
bappiness. 



coNSUi^rrTiON for gratification. 67 

5. Moral gratifications, through the culture of a 
good conscience toward God and toward men, and 
the exercise of benevolence. To secure these, some 
value must be consumed in the support of religious 

nstitutions and in gifts of charit}'. B3' such expen- 
ditures the noblest capacities of our nature are drawn 
out ; arc! for the expenditure there is returned the 
richest satisfaction, — a satisfaction not limited to 
the moment, but abiding for the lifetime of the soul. 

The rule of economy applicable to consumption 
for gi'atification is essentiallj' the same as that laid 
down for reproduction. It may be stated in a gen- 
eral way thus : Sound economy dictates that ^ve 
secure the largest and best gratification at the least 
practicable consumption of values. This rule sug- 
gests 

a. That the quantity of articles consumed be 
limited by the actual needs. Americans may learn 
economy- in this respect from most European peoples. 
Quite generally our tables are loaded with a profusion 
of food which is simply wasteful. Ordinarily it is 
more economical to purchase supplies for the house- 
hold from day to day, at retail, than at wholesale, 
though the prices paid are higher. So, too, it is 
commonh' unwise to purchase an article just because 
it is cheap. The first and main question is alwaj's* 
''Is it needed?" 

6. The consumption should be as perfect as pos- 
sible, exhausting every utility. The surplus of a 
dinner may provide for the next breakfast. An 
article of clothing outgrown by one child may be 
made over for a younger. Bad cooking is alwayr 



58 POLITICAL ECONOMY. 

wastefuL Hence it is good economy to provide a 
house with the best cooking-utensils, with fuel that 
produces most heat, and with competent servants. 
Hence, too, a knowledge of domestic econoni}^ and 
a careful superintendence of the operations, on the 
part of the mistress of a family, is of the highest 
consequence to home comfort. 

C. Good judgment is to be exercised in the selec- 
tion of our gratifications. Of two gratifications that 
are equal, it is wise to choose the least expensive. 
That which favors phj'sical health is to be preferred 
to that which tends to disease. Those which refine, 
strengthen, and elevate our being are to be chosen, 
rather than those which degrade and weaken us. In 
our individual gratifications we have occasion to 
regard social consequences, and, both for our own 
sake and for the good of others, choose those which 
improve, in preference to those which demoralize, 
society. 

In general, intellectual and moral pleasures are 
inexpensive, as compared with sensual gratifications, 
and those which minister to fashion and vanity. 
The cost of an hour of drunken frolic or gluttonous 
feasting will buy books for a j'ear's higher enjo}^- 
ment ; and the sums spent in the ostentatious dis- 
play of dress, at the beck of the despot Fashion, 
would furnish means for many deeds of charity 
which would fill with perennial joy the hearts of both 
giver and receiver. 

Before leaving this topic, a few things need to be 
said on the reciprocal relation between production 



CONSUMPTION FOR GRATIFICATION. 69 

and consumption for gratification. The productioi 
of goods is always carried on with reference to their 
consumption, and rapid and an pie consumption is 
the true stimulus of production. As another ha* 
expressed it, " Material welfare consists in an ample 
consumption: ample production assures abundance; 
and, under the law of competition, abundant pro- 
duction assures rapid and more equal consumption." 

Extreme frugality would leave goods in the hands 
of producers uncalled for, and at once throw laborers 
out of emplo3"ment and out of the means of living. 
Extreme luxury would consume resources and hinder 
the accumulation of capital necessary for production. 
The problem is, to find the golden mean which shall 
keep the balance that sustains prosperous industrj^, 
by a steady demand for its products. The problem 
can be solved only as each man studies it, and finds 
the solution for himself b}" using his means for 
healthful gratifications, at the same time limiting his 
gratifications b}' a due regard to his means. 

Where great inequalities of condition prevail, the 
lavish expenditure of the rich in luxurious consump- 
tion is no doubt a blessing, as it gives emplo3Tiient 
and the means of living to the poor. But for the 
greatest general good there is a better use of the 
superfiuous wealth of the rich, by its emplo3-ment as 
capital in a wa}' to give the poor a chance to increase 
their means, and at the same time to multiply and 
cheapen products so that all the people — the rich 
and the poor alike — may have more of comforta 
and luxuries within their reach. 



60 POLITICAL ECONOMY. 

EXERCISES. 

1. Name what you think are necessaries of life. 

2. Name the luxuries enjoyed in your home. 

3. Name some articles which are necessaries in on4 
family and luxuries in another. 

4. Can you name an article now regarded as a universal 
necessity, which was unknown two hundred years ago ? 

5. Illustrate the different wants of people of different 
classes and of different countries. 

6. Is it an extravagant outlay for a rich man of culture 
to spend twenty thousand dollars for a library ? What if 
his library is kept for show, and seldom used ? 

1. Illustrate the evil of undue indulgence in luxuries. 

8. Are cheap goods always the most economical ? 

9. When is a large outlay for a social entertainment 
justifiable ? 

10. Is there any exception to the rule that one's gratifi' 
cations should be limited by his income ? 

11. When is it important to learn how to spend, as well 
as how to save ? 

12. Is it desirable that all should restrict their expendi- 
tures to bare necessities ? 

13. How can we dispose of our surplus food-productg, 
unless we use tea, sugar, silk, &c., brought from other 
countriee ? 



PUBLIC CONSUMPTION. 61 



CHAPTER IIL 

PUBLIC CONSUMPTION, 

The Nature of Public Consumption. Undei 
the social instinct mankind gather and live in com- 
munities. This gives rise to certain common wants, 
which are provided for by public agents of the 
government, using means drawn from those who 
compose the society or state, by taxation. 

These common or public wants can be satisfied 
only by the destruction of values, just as in indi- 
vidual consumption. It is to be remembered that 
the values thus destro3'ed are a pai't of the property 
of individual citizens taken for public use. In gen- 
eral, the government has nothing to expend but 
what is contributed by its tax-paying citizens. In 
ancient times despotic governments called out thou- 
sands of their people to labor directl}' in building 
city- walls and other public works, and collected from 
others the food necessary to sustain them, and the 
materials to be used. This was a direct and obvious 
draft on private property for public use. In medi- 
aeval times, when a sovereign made war, he called on 
his vassals to send each his quota of men, fur- 
nished with horses and armor, and food for their 
sustenance. Each individual thus felt immediately 
the burden of the values destroyed in public con» 



61 POLITICAL ECONOMY. 

sumption. The same thing is involved in the 
modern system of providing for the public consump- 
tion by taxes paid in money. The farmer sells a 
portion of his grain, and with the mone}' pa3's his 
tax ; the next day the commissary of an arm}^ may 
take the same mone}^ and buy up the same grain for 
the use of the government troops. Or, if the pro- 
cess is more complex and roundabout, it comes ulti- 
mately to the same thing, — a part of the farmer's 
crop is consumed, its value destro3^ed, not for his 
private advantage, but for a public use. 

A clear apprehension of this very simple truth is 
needed to correct a notion entertained by man}', and 
often expressed, that large public expenditures are 
a benefit, provided only the money remains in the 
country. In all public consumption it is goods, 
real values, that are destroyed. The wisdom of the 
expenditure is deteiTuined by inquiring what propor- 
tion the benefit attained bears to the value destroj^ed. 
The benefit, however, ma}' appear in an immaterial 
form, as in the maintenance of justice and the pro- 
motion of general intelligence. The thing to be 
insisted on is that there shall come a real good as 
large as possible, from a destruction of value as 
little as possible. 

The Purposes to which Public Consumption 
is properly applied maj' be specified as follows : — 

1. For the support and administration of govern- 
ment. Law and order are grand essentials of good 
society. On them depend the securit}'' of private 
property and of personal enjoyment. To secure 



PUBLIC CONSUMrTION. 63 

these, legislators, executive officers, and judges must 
be supported, and buildings furnishing suitable 
accommodations for these functions of government 
must be erected at the public expense. It is good 
econom}' to pay salaries sufficient to secure the bef-t 
talent for these services. 

2. For works of public convenience, commonly 
called public improvements. Here are included 
such things as paving, cleaning, and lighting the 
streets of a city, providing water-works and sewer- 
age, constructing roads and canals, improving har- 
bors, building and sustaining light-houses, &c. 
These works confer benefits upon the whole commu- 
nity. It is just, therefore, that they should be paid 
for out of the common treasury. For them, also, it 
is often necessarj^ that private propert}' be taken for 
jDubhc use, In' the right of eminent domain, a right 
peculiar to the government. 

3. For advancing science, and diffusing intelli- 
gence for common interests. Under this head be- 
long exploring expeditions, astronomical observa- 
tions, geological surve3's, coast-surveys, meteorolo- 
gical observations, entomological investigation, and 
the whole post-office S3'stem as a means of diffusing 
intelligence and promoting social communication. 
Expenditures for these things ^ield broad, general 
benefits of the highest importance. By its S3'stem 
of storm-signals, our National Observatory saves 
3'early wealth exposed to the dangers of the sea, 
whose value is a hundred-fold that consumed in its 
maintenance. 

4. For the promotion of popular education. The 



64 POLITICAL ECONOMY. 

prosperity of a country depends very much on the 
intelligence of its people. General education tends 
to a wise application of industr\', and makes it more 
effective. It brings labor and capital to meet more 
nearlj' on an equalitj^, and promotes the harmony of 
their co-operation. It is of advantage to every 
honest man to have intelligent men to associate and 
to deal with. For such a common blessing it is fit 
that the common funds provide, to some extent, and 
at the same time, that scope be given for private 
beneficence to be exercised for the same end. 

5. For the care of classes afHicted by peculiar 
calamities or deprivations. Hospitals for the sick 
and for the insane, and institutions in which the deaf, 
the blind, and the feeble-minded may by pecuhar 
processes receive an education, are here referred to. 
Our common s}Tnpathies and benevolence prompt 
such means of relief for the unfortunate. They can 
be most economically provided b}" the government. 
Their benefits must be largel}^ gi'atuitous because 
such misfortunes come in largest proportion upon 
the poor. 

6. For the relief of poverty. The poor we have 
always with us. Every encouragement should be 
given to the exercise of private charity for its relief, 
because Christian beneficence brings a blessing to 
the giver as well as to the receiver. But there is 
necessit}^ also for some public provision for the poor, 
to meet some cases which fall outside the range of 
private beneficence, and also to offer some facilities 
for the poor to do something towards their own 
support. It is unwise, however, to dispense either 



PUBLIC CONSUMPTION. 65 

public or private charity in a way to encourage 
pauperism. 

7. For the nation's defense. The general good 
is involved in the nation's life. While selfishness 
rules human hearts as it does, especiall}" in in- 
ternational relations, exigencies will arise when 
nothing but military force will save a nation's life. 
Such exigencies must be anticipated by due appro- 
priations for forts, and armies, and navies, and the 
various munitions of war. When war is inevitable, 
then no expense is unreasonable which is necessar3' 
to prosecute it with the utmost vigor. Yet it must 
ever be remembered that war is alwa3's destructive, 
terribly destructive, of both wealth and of men who 
produce wealth. 

With reference to the whole range of public con- 
sumption, sound economy dictates two plain and 
simple rules : — 

1. The style and scale of national expenditures 
should be such as to command the respect and honor- 
able pride of the people without useless display. 

2. The methods of national expenditures should 
be such as to hold all agents of government to a 
direct and strict responsibility, and to insure the 
utmost fidelity in the discharge of all trusts. 

EXERCISES. 

1. Illustrate the destruction of values drawn from pn« 
vate wealth, in the public lighting of city streets. What 
benefit accrues tlieref rem, and who enjoy the benefit ? 

2. Is fraud in public expenditures less criminal than io 



66 POLITICAL ECONOMY. 

private relations? What false sentiment prevails on this 
subject ? 

3. Name the blessings of good government which war- 
rant expenditures for its support. 

4. The members of the British Parliament receive na 
compensation for their services : what objections to apply- 
ing the same rule to our members of Congress ? 

5. Wliy should the general government maintain light- 
houses, instead of leaving the citizens of each port to pro- 
vide their own ? 

^ 6. Give reasons for or against the policy of railways 
being built and run by the government. 

7. Should the government control the operations of the 
electric telegraph as it does the postal system ? 

8. Why is it right for a legislature to appropriate money 
for a state geological survey ? 

^ 9. Why is it right that a man who has no children be 
taxed for public schools ? 

10. What benefit accrues from monuments, Fourth-of. 
July celebrations, &c., to justify the outlay of public funds 
for such purposes ? 

11. Why should a state maintain special institutions fof 
the care of the insane and the education of the deaf ? 

12. Why should criminals in a state-penitentiary be com- 
pelled to work ? 

13. Should those whom sickness or calamity has reduced 
to poverty feel disgraced by accepting public relief ? 

14. Mention some of the evils of pauperism as it exists 
n England. 

15. How does war stimulate production ? Does this f acl 
piake war less a calamity ? 



DISTRIBUTION. 61 



PAUT in. 

DISTRIBUTION. 

We have seen, that, for the production of wealth, 
labor must be joined with capital ; that various kinds 
of labor and divers forms of capital are involved; 
that the general industry of a people includes the 
Jabor of men of various occupations and profes- 
sions ; and that the protection of good government 
is essential to prosperous industry. The value of 
each article produced, estimated by its cost, repre- 
sents, therefore, a number of different services ren- 
iered by different persons. 

Thus problems arise respecting the distribution, to 
each one concerned in the process of production, of 
his share of the value created. The third division 
of our science is occupied with these problems, and 
may be defined thus : — 

Distribution is that department of Political 
Kconomy ^vhich determines the principles on which 
the proceeds of industry are divided among the par- 
ties concerned in their productiono 

The parties to be recognzied are three : First. 
the Laborers of all grades, whose energies, phj'sical 
and mental, are directly or indirectly engaged. 



68 POLITICAL ECOXOMT. 

Second, tlie Owners of tlie Capital, the fruit of past 
labor saved, and now combined with present labor 
for a joint result. Third, the Government, which 
secures the safet}^ and the rights of all, and which 
draws on the proceeds of industr}' generally for its 
maintenance. 

But the stimulus to all industrj' and enterprise is' 
the anticipation of profits, i.e., a surplus of values 
produced above those consumed ; and the success of 
Industry is measured by its profits. Hence arises a 
special question of prime importance, respecting the 
apportionment of the profits. 

This department will be treated, therefore, under 
four subdivisions, viz. : — 

1. The Eemuneration of Labor. 

2. The Eemuneration of Capital. 

3. The Distribution of Profits. 

4. The Revenues of the Government. 



CHAPTER I. 

THE KEMUNEEATIOjS" OF LABOR. 

Terms used. The compensation of labor is ex 
pressed by diff'erent terms. Mr. F. A. Walker sa3'3 
that "of English-speaking people, three - fourths 
probabl}', two-thirds certainly, subsist on wages." 
This term is applied to manual labor of all grades. 
It means a stipulated reward for services rendered, 
rated either by the time occupied or by the work 
accomplished, by the day or by the piece. It pre- 



THE REMUNERATION OF LABOR. 69 

supposes the relation of emploj^ers and emplo3^ed, 
bound b}' mutual stipulations, which may be varied 
or terminated on short notice. 

Salary expresses a fixed sum of mone}', reckoned 
usually b}' the 3'ear, for services which involve brain- 
work and responsible trust. Thus in a large manu- 
factorj', the mass of laborers receive wages, but the 
treasurer, the superintendent, &c., have salaries. 
Clerg3^men, teachers, and civil officers are generally 
compensated b}' salaries. The term implies an en- 
gagement of some permanence, and a grade of ser- 
vice requiring special qualifications and previous 
education. 

Some agents are compensated hj commissions; 
that is, a certain rate per cent of the value involved 
in each transaction. The term is applied to brokers, 
insurance-agents, collectors, travelling salesmen, and 
the like. In this case, the employer is responsible 
only for what is actuall}' done ; and the agent's 
reward depends on his personal enterprise, tact, and 
fideht}'. 

Law3^ers, physicians, and certain civil officers are 
remunerated b3^ fees. The term originated probably 
In the gratuit3^ formerl3^ offered b3^ a party benefited 
for a service done. Hence more or less indefinite- 
ness in this mode of remuneration. The rate is 
adjusted for each particular service b3^ usage, or by 
the arbitrar3' demand of the part3^ rendering the 
service, or b3' the good-will of the party served. 

The questions respecting wages involve the most 
difficult problems of Distribution, and demand our 
first attention. 



70 POLITICAL ECONOMY 



SECTION L— NOMINAL AND REAL WAGES. 

Nominal wages are wages estimated in terms of 
money. 

Real wages are measured by the necessaries, com- 
forts, and luxuries of life, which they will command. 
It is important to observe this distinction, in com- 
paring the rates of wages in different countries and 
at different periods. The money-wages of an Eng- 
lish laborer may be much less than that allowed an 
American ; but the j^rices of all things which sup- 
port life may be so much lower in England than in 
America as to nullify the difference. The laborer 
who receives the lowest money-wages may be the 
best off. In 1843 the rate of wages for an Ameri- 
can day-laborer was one dollar per day ; in 18G5 
the nominal rate was doubled : yet the one dollar 
of 1843 would buy a third more of comforts than 
the two dollars of 1865. 

Several causes tending to produce this difference 
are worthy of notice. 

1 . The most influential of all is the fluctuations In 
the pvirchasing power of money. A sudden increase 
in the amount of that which passes as money must 
diminish the purchasing power of each dollar. The 
fact appears in enhanced prices for all commodities. 
The use of paper money leads generally to sudden 
expansions and contractions. The worst mischief 
of such fluctuations falls on those who live by wages. 

2. The form of payment often makes a diffeie 



NOMINAL AND KEAL WAGES. 71 

between nominal and real wages. While wages are 
generally reckoned in mone}', they are not always 
paid in mone3\ With farm- laborers, their board is 
counted as a part of their wages. Manufacturing 
laborers are sometimes paid b}' the "truck-system," 
as it is called ; that is, b3' orders on stores, where 
prices are fixed somewhat arbitTaril3', ruling out 
competition. 

3. The greater or less regularity of employment 
affects the real value of wages. In agriculture, 
brick-making, house-building, the fisheries, and the 
Mke, labor is in measure precluded at certain seasons 
and crowded at others. The real remuneration of 
labor must therefore be estimated not by the wages 
of one daj' or one month, but by that rate as quali- 
fied b}^ the regularity or irregularity of each occupa- 
tion. 

4. The duration of the power to labor must be 
taken into account in determining the difference 
between nominal and real wages. Vital statistics 
show that the number of 3'ears during which a man 
can expect to have strength and vigor to earn wages 
varies with men of diflerent nationalities, in different 
climates, and in different occupations. Glass-blow- 
ing, and almost all work in mines, are exhausting 
occupations. Men can continue them but few years. 
To know the real compensation of labor, therefore, 
we must estimate the wages of a lifetime. 

If the use of machinery tends to depress nominal 
wages, it tends also to multiply' and cheapen the 
necessaries of life so as to enhance real wages. 
The la,borer of to-day enjoys many comforts which 



72 POLITICAL ECONOMY. 

were hardl}- known a half-century ago. At the 
same time the fact of having enjoj^ed these things 
freely makes it a hardship now to be in anj^ degree 
deprived of them. 



SECTION" II. — THE EFFICIENCY OF LABOR. 

Labor, as an element of production, must be esti- 
mated not by the time occupied, nor by the rate of 
wages paid, but by the efficiency of the labor itself. 
With respect to eflficiencj^, men differ greatly. All 
who have occasion to employ numbers of men know 
this very well, and must recognize a distinction 
between the nominal cost of labor, indicated by the 
wages paid, and its real cost, estimated by the value 
of the work done. The English contractor, Mr. 
Brasse}^, found that a London brickla3'er employed 
at five shillings a da}^ did more work than two coun- 
try workmen who were each paid three shillings and 
sixpence a da}^ 

We may name the following causes of difference 
in efficiency : - — 

1 . Peculiar qualities of blood and race. Phj^sical 
influences, such as local climate, customary food, 
and habits of fife, continued through manj^ genera- 
tions, modif}^ the physical structure of a race. 
Hence come differences in height, weight, muscular 
strength, and especially in nervous force and spirit. 
Thus the Chinese and Japanese fall below the aver- 
age of men in stature, and the Scotch rise above 
it. The French, without great size or vigor, arc 
more than ordinarily quick and active. The Eng* 



THE EFFICIENCY OF LABOR. 73 

lish and Germans have great patience and endur- 
ance. Peculiar characteristics become hereditary-, 
and mark whole races. 

2. The quantity and quality of food and clothing. 
^ man who lives chiefl}- on potatoes or rice cannot 

ave the strength and vigor of those who have a 
more varied and generous diet. This matter is 
carefullv studied in the rearino- of workino;-animals : 
wh}^ should it not be as much regarded with respect 
to working-men? Clothing and food help each 
other in maintaining the warmth of the body. 

3. Habits respecting cleanliness of person, and 
purity of air and water. Whatever depresses a 
man's vitality must diminish his efficiency. What 
can more effectuall}' impair health and depress nerv- 
ous force, than to live, as too many laborers do, 
crowded in narrow, filthy tenements, where the sun- 
light is excluded, and the water is contaminated 
with sewage-matter, and the air is charged with 
noxious poisons? 

4. Intelligence is an important element of efficiency 
in a laborer. One who has learned to read and write 
has thereb}' improved his capacity to learn and 
exercise a trade. Intelligent laborers can think for 
themselves, and with little superintendence strike 
for the object aimed at in their labor, at the same 
time exercising their invention to devise means for 
increasing the efficienc}' of their toil. 

5. Technical education and industrial associations 
increase the efficiency of labor. Instincts are heredi- 
tar}' ; and one gains unconscious tuition by contact 
and familiarity with organized industry. In asso- 



74 POLITICAL ECONOMY. 

ciation with good workmen, a boy grows into liabita 
of quick observation and manuai dexterity, and so 
learns tlie best part of his trade before be begins 
Ms regular apprenticeship. 

6. Cheerfulness and hopefulness of spirit help 
much to make labor efficient. These qualities grow 
out of self-respect, social intercourse, and the labor- 
er's personal interest in the result of his work. 
Slave-labor lacks these elements, and is therefore 
unprofitable. The laborers may be put on starva- 
tion-wages, and so reduced to the level of slaves. 
It is for the interest of employers, as well as of 
laborers, that wages should be such as to inspire 
cheerful hope. 

EXERCISES. 

1. If the annual product of a watch-factory is valued at 
half a million dollars, among what parties must this sum 
be divided ? 

2. What claim has a stockholder of the company on the 
product ? 

3. How will the workman who makes only hair-springs 
get his share ? 

4. Whence come the means to pay the tax of five hun- 
dred dollars laid on the property ? 

5. How large a portion of the fifty employes will receive 
wages ? 

6. Who of them will be paid salaries ? 

7. How will the salesman who travels to sell the watches 
be paid ? 

8. How is the lawyer employed to collect bad debt* 
compensated ? 

9. xiominal wages are now in 1879 fifty per cent lower 
than in 1873 : how is it with real wages ? 

10. Illustrate how an increase of money affects real 
wages. 



THE EFFICIENCY OF LABOK. 75 

11. Under an expanding currency, do wages rise as soon 
or as high as the prices of goods ? Why ? Which, wages 
or prices, first go down under a contraction of currency ? 

12. What objection may a laborer Make to receiving hia 
wages in orders on a store, especially if the store belouga 
to his employers ? 

13. Why is it right that the nominal wages of a brick- 
layer should be higher than those of a shoemaker ? 

14. Do you know any reason why the smelters of lead- 
ore should be paid higher wages than farm-laborers just by 
them? 

15. What causes combine to make our native American 
or Yankee laborers peculiarly efficient ? 

IG. Why is it good economy for a manufacturing com- 
pany to provide neat and convenient tenements for their 
employes ? 

17. Is it a wise and just law which compels laborers to 
send their children to school for a certain portion of their 
time ? Why ? 

18. What is the advantage of thorough apprenticeshii^ to 
a trade ? 

19. Does the habit of singing while at his work impair; 
or improve, a laborer's efficiency ? 



76 POLITICAL ECONOMY. 



SECTION IIL — CONSIDERATIONS WHICH DETER- 
MINE THE RATE OF WAGES. 

Wages imply a contract between two parties, — a 
promised reward for promised services. The two 
parties join in the contract for their mutual advan- 
tage, yet each having a separate interest. The 
wages agreed on must be determined b}' som.e regard 
to each of these separate interests. 

1. On the side of the laborer, the first considera- 
tion is the cost of living. The man depends on his 
wages to provide for himself shelter, food, and cloth- 
ing, that he may be kept in health and vigor, fit for 
work. More than this, since man is short-lived, 
children must be reared, in order that the stock of 
laborers may be continued. There must be also 
some provision for the laborer in his old age, when 
he is too feeble to work. Whatever is essential to 
the support of the laborer and family, must thus be 
taken into the account ; and this consideration deter- 
mines what some writers term necessary wages. Its 
chief force is to define a limit below which wages 
cannot be set to continue long without inducing 
misery, and reducing the number of laborers. 

The cost of living varies in different climates, 
and, to some extent, according to the habits of dif- 
ferent races and classes of people. Hence in warm 
countries wages may be lower than in cold. The 
habits of the Chinese enable them to live on less 
wages than Americans. It is, however, a bad sign 



THE RATE OF WAGES. 7^ 

for a people's prosperity and happiness, when wages 
are pressed down to this lowest limit. The compen- 
sation of labor should be such as to give the dili- 
gent and thrifty a chance to multiply their comforts 
nd improve their condition. 

2. On the side of the emploj^er, the main consid- 
eration is the value of the products. The empl03er 
embarks his energy and capital in a branch of pro- 
ductive industry, expecting from the sale of the 
products to have a surplus for his own reward, after 
paying wages and all other costs. His power to 
pay wages depends on the purchasing power of 
these products. When their price in the market 
rises, he can afford to pay higher wages ; when it 
declines, he may be compelled to stipulate for re* 
duced wages. The value may be so reduced tha^ 
he will have no alternative but to close his opera- 
tions, and extricate his capital as best he msiy. 

The chief force of this consideration is to define 
a limit on the other side, — a limit above which 
wages cannot rise to continue long without ruining 
the business. The laborer comes to the nesfotia- 
tion, asking at least such wages as are necessary for 
his support. The emploj'er comes, offering at most 
such wages as he thinks the value of the products 
will enable him to pay. The actual agreement will 
strike a point between the two extremes, fixed by 
other considerations hereafter to be named. These 
two considerations suggest this general statement. 

The minimum limit of wages is the rate necessary 
for the support of the laborer and his family. The 
maximum limit is the rate determined by the market* 



78 POLITICAL ECONOMY. 

value of th€ products. The mere will of eithei 
party cannot safely change these fixed limitations. 

3. The cu( tomary rate of wages is a consideration 
of some fore 5 in determining the rate that shall be. 
There is alw ays a presumption in favor of existing 
usage, whicli, in the negotiation, may be pleaded on 
one side or the other with some effect. This con- 
sideration resists any contemplated change. Thus, 
when, in 18(55, an inflation of the currency in the 
United States had increased the cost of living, and 
at the same time increased the prices of products, 
there was noed that wages be advanced ; but em- 
ployers clung to the old rates, and 3^ielded very 
reluctantly to the rightful demands of their emplo3^es. 
Ten years la';er the condition of things was just the 
opposite. Both the cost of living and the prices of 
all productions were greatly reduced, and emplo3'ers 
were constrained to reduce wages accordinglj-. But 
then the laborers clung to existing rates, and resisted 
the proposed reduction, often with violence. This 
is, however, a qualifying, rather than a determining 
consideration. Like the law of inertia in phj^sics, 
U resists or impedes all changes of wages. 

4. Competition is beyond all others the controlling 
consideration, determining the rate of wages. The 
other considerations named have some weight. This, 
while it cannot nullif3", does overbear them. 

Competition is the struggle of tw^o or more persons 
to gain the same thing at the same time. Many labor- 
ers are seeking wages, and high wages, at the same 
time. Man}' emplo^'ers are seeking profits as large 
as possible at the same time. Competition becomes 



THE RATE OF WAGES. 79 

active just in proportion to the comparative num- 
bers on either side. If the number of laborers ia 
large in proportion to the emplo3'ment offered, ?. 
sharp competition arises between those seeking 
work. Each, rather than lose his chance for wages, 
will lower the rate at which he will contract. If the 
number of emplo3'ers is large, with a large amount 
of capital in proportion to the number of laborers, 
a sharp competition arises among emplo^'crs. Each, 
rather than lose his chance for anticipated profits, 
will raise the rate of wages he is willing to pa}'. 

If, for au}^ reason, the wages in a particular 
branch of industry rise above the ordinary rate, a 
speed}^ rush of laborers into that emploj'ment inten- 
sifies competition till the wages are brought dov/n. 
On the other hand, if a particular branch of pro- 
duction yields profits above the ordinary' rate, there 
£omes a rush of employers with their capital into 
that business ; wages are raised, and products are 
multiplied and cheapened till profits are brought 
down to the ordinary level. Competition thus tends 
to bring wages and profits to an equilibrium most 
favorable to the interests of all. In the nature of 
things, competition is inevitable : it has a blessing 
in it, and it is simply absurd to ignore or con- 
demn it. 

If competition were universall}' free and fair, it 
would do much to remove present inequalities of 
condition, and the burdens and the benefits of human 
industry would be equalh' distributed. But over- 
reaching selfishness is continually interfering with 
>:)mpetitiou to make it neither free nor fair. We 



80 POLITICAL ECONOMY. 

cannot rule out all competition. It would be neither 
just nor wise to do so if we could. But much 
ma}' be done to resist abuses of the principle, and 
to give full scope for its natural and beneficent 
function. 

5. The Golden Rule of Christ, "Whatsoever ye 
would that men should to 3'ou, do ye even so to 
them," presents a consideration which both Political 
Economy and Christian Ethics may fitly recognize 
and enforce in its application to the question of 
wages. Genuine self-interest, as distinct from rank 
selfishness, dictates the adoption of this rule. There 
are pleasing indications that it is in increasing meas- 
ure regarded in the mutual relations of labor and 
capital. Men like Mr. Bright in England, and cor- 
porations like the Pacific Mills in our countr}', act- 
ing on this principle, show clearly how it tends to 
soften animosities, to inspire mutual confidence, and 
to effect genial co-operation, so as to increase the 
efficiency of industry, and give all an equal share in 
its products. 

Certain combinations to resist competition must be 
noticed in this connection. Combinations on th 
part of laborers take two forms, strikes and trades 
unions. 

A strike is a mutual agreement of a number of 
workmen to stop work until their emplo3'ers accede 
to certain prescribed terms. It must be admitted 
that laborers have a right to define terms of the 
contract with their employers, and to refuse to work 
except on those terms. It is their right also to 



THE RATE OF WAGES. 81 

combine in counsel and effort to maintain their com- 
mon interests, and earnestl}'' to press their claims. 
But one set of workmen have no right to interfere 
with the freedom of others who do not choose to 
join the strike. The first, the most sacred, the 
dearest right of every laborer, is the right to do 
what he will with himself, his time, his strength, his 
skill. Yet since the strike, in order to be effective, 
must rule out all competition, threats and violence, 
instead of simple persuasion, are resorted to as 
means of preventing other laborers willing to work 
from doing so. This is a flagrant outrage on the 
most precious right of freemen. 

As a strong and determined assertion of a reason- 
able claim, a strike ma}' do good service ; but the 
claim is reasonable only when the necessities of the 
laborers require, and the prices of products permit, 
the increase of wages, or whatever better terms are 
insisted on. Then there is a better way : it is b}' a 
frank and open negotiation between the parties. In 
prosperous times, there is little occasion for strikes. 
In adverse times, strikes can accomplish onl}' dis- 
aster to all parties. For, as Mr. Brassey says, 
"Strikes against a falling market alwa3's fail." 

Trades-uuions are combinations of laborers of 
particular trades in permanent organizations to 
promote the general interests of their respective 
fraternities. These associations often perform the 
functions of mutual benevolent societies. Contri- 
butions are made for the relief of sick, disabled, 
and distressed members ; and measures are em- 
ployed to promote sympathy, social enjoyment, and 



82 POLITICAL ECONOMY. 

mental culture. They thus render beneficial ser« 
vice, and are worthy of praise and encouragement. 

But often these associations attempt to regulate 
wages, by resisting competition, in two ways : First, 
by promoting and sustaining strikes, in which they 
are likely to aggravate the evils already referred to, 
because under them the strike is better organized 
and more domineering. They are apt also to insist 
on uniformity of wages irrespective of the varying 
abilities and efficiency of different workmen, which 
involves injustice to superior artisans as well as to 
employers. Second, by restricting apprenticeship, 
which is simply an attempt to rule out free compe- 
tition, and give to a limited number of persons a 
monopoly of certain forms of skilled labor. This 
involves the injustice and mischief which are inher- 
ent in the very principle of monopoh'. If generall}' 
carried out, it would set the various branches of 
industry in antagonism to each other, and tend, as 
Mr. Brassey says, "to establish that subdivision of 
caste which has been the great curse of India." 
When managed for these ends, trades-unions involve 
heavy taxes on the members, and often subjection 
to seliSsh and reckless leaders, who seek their own 
personal interests rather than the common good. 

On the other side, combinations of employers are 

often formed to resist competition. Such combina- 
tions sometimes attempt to regulate the prices of 
products, creating a monopoly in the general mar- 
ket. Their action in this form belongs to the 
department of exchange. They attempt 'also to 



THE RATE OF WAGES. 83 

regulate wages b}^ agreements not to pay above 
certain rates. While the right to ent»r into such 
agreements cannot be questioned, the actual combi- 
nation involves an abuse of the power of capital 
to tj'rannize over labor and dictate terins. It pro- 
duces in the laborer a sense of injur}' ^, and incites 
antagonism and attempts at retaliation, which pre- 
vent the cheerful co-operation of the two great 
factors of industry. 

Such combinations seldom succeed in controlling 
wages except for very brief periods. To be effec- 
tive, the combination must embrace all who are 
engaged in a particular industry, and also all the 
capital likely to be drawn into it. If the wages 
fixed b}' the combination are so low as to make the 
profits larger than those of other forms of business, 
free capital will rush in and bid for laboiers by rais- 
ing wages, thus renewing competition, and defeating 
the end sought. 

Experience shows that combinations on either 
side, to prevent free competition, cannot, for any 
long time, materially influence the rates of wages. 
Such attempts interfere with the natural law of 
supply and demand, which is the grand regulator of 
wages for the best interest of all concerned. When 
issues arise between the parties to the labor-con- 
tract, the surest way to a fair adjustment is b}' frank 
mutual explanations, or, in the last resort, b}* joint 
reference to just arbitration. In most cases, the 
occasion of difficulties may be forestalled b}* the 
culture of mutual good-will in active co-operation 
for the common good, intelligently apprehended and 
prosecuted on both sides. 



84 POLITICAL ECONOMY. 

EXERCISES. 

1. Can either party, employers or employed, arbitrarily 
fix a rate of wages for labor ? 

2. Can the government, by law, fix a rate which will 
stand? Why not? 

3. Why ought not laborers to be content with wages 
which suffice for their bare support ? 

4. Illustrate the effect of climate on the scale of living, 
and by consequence on the rate of wages. 

5. When the cost of living is increased, are laborers to 
be blamed for demanding higher wages ? 

6. Are manufacturers to be blamed for reducing wages 
when the prices of their products decline ? 

7. When business is depressed, is it right that high 
dividends to stockholders should be maintained by reduced 
wages ? 

8. Illustrate the conservative influence of custom on 
wages in some one trade. 

9. AVhy is the rate of wages generally higher in a new 
ihan in an old country ? 

10. Illustrate the effect of a financial panic on wages. 

11. What reason have laborers to think that free compe- 
tition bears most hardly on them ? 

12. If over - population by sharp competition reduces 
wages to the starvation limit, can a strike relieve the 
case ? How can such a case be relieved ? 

13. Slate the results, good or bad, of any strike which 
you have known about. 

14. State what benefits and what evils you have known 
to come from membership in a trades-union. 

15. What consequences would follow if the policy of 
limiting the number of apprentices were carried out in all 
forms of industry requiring skill ? 

16. What is there to prevent the application of " the 
Golden Rule " in the mutual relations of laborers and their 
employers ? 



REMUNERATION OF LABOR. 85 



SECTION IV. — CAUSES OF VARIATION IN THE 
REMUNERATION OF LABOR. 

Evidently all kinds of labor are not compensated 
alike. Competition tends to produce uniformit}' of 
compensation. Whatever, then, diminishes the in- 
tensity of competition, opens the way for other 
causes to produce variation. Several circumstances 
thus affecting competition may be named : — 

1 . The ease or difficulty, the agreeableness or dis- 
agreeableness, of the employment. For easy work, 
many are ready to compete ; but from hard work, 
many draw back, and the number able to put forth 
great muscular effort is small. Mining-work under 
ground is disagreeable ; the number willing to en- 
gage in it is much less than of those read}- to do 
pleasanter work on the surface : hence onl}- a better 
compensation will induce an}' to go below. It is 
not an uncommon thing for a gentleman to pay a 
male cook more than his private secretary ; the 
dignity attached to the one office, and the menial 
character of the other, accounting for the difference. 

2. The skill required in the operation. Here we 
note the difference between simple labor and edu- 
cated labor. Skill can be acquired onl}' by practice 
and training, which cost both time and monej'. It 
becomes thus an investment, for which the possessor 
ma}' justly ask a compensation. Unusual skill sup- 
poses unusual natural endowment, the rarity of 
which precludes sharp competition. 



86 POLITICAL ECONOMY. 

3. The amount of trust involved in the occupation. 

In services about banks, or which in an}^ wa}^ involve 
the handling of money ; in manufactures where, as 
in the case of jewelrj^, the precious metals are put 
into the hands of workmen as materials ; in railway 
operations, where the safet}' of man}^ persons and of 
large amounts of property depends on the conduct 
of a single engineer, — in these and similar cases, 
good judgment and incorruptible integrity, as well 
as skill, are required. This combination of qualities 
is comparatively rare. Hence, while the demand is 
imperative, the supply is small, and competition for 
such places is restricted. For such positions, it is 
good econom}^ to pay trustworthy^ men extraordinary 
compensation. 

4. The constancy or Inconstancy of employment. 
In out-door occupations, such as those of the car- 
penter and brickla3^er, work is interrupted by bad 
weather, rainy days, and the winter-season. The 
compensation for the working time must be larger 
than ordinarj^, to cover the time when work must be 
suspended. 

5. The probability or improbability of success. 
This consideration applies more to what are called 
the professions than to ordinar}^ trades. He who 
learns the trade of a carpenter may be almost sure 
of finding emploj^nent at some compensation ; but 
one who studies for the profession of a law3'er has 
hardly an even chance of being able to live by 
his profession, and, at best, must persevere through 
years of unremunerated toil, to establish a reputa- 
tion which will assure him full success. The high 



REML'NERATION OF LABOR. 87 

remuneration for successful practice is the prize 
which sustains one in the eadier stages of the race. 



The remuneration of labor by salaries, com- 
missions, and fees, involves some pecuharities 
which must be noticed. 

1. The labor which is thus compensated is gen- 
erall}' of a kind that requires both superior natural 
gifts, and special and expensive education. 

2. It is also true of it, that on the one side, per- 
sonal character and reputation, and on the other, the 
respectability, dignity, and permanence of the ser- 
vice, are highly estimated. 

These considerations, more or less, rule out ordi* 
nar}' competition, and put the mutual contract in 
each case on special grounds. The whole number 
of those whose labor is thus compensated is small, 
compared with the great bodj' of those who receive 
wages ; and, to the few so favored, a large share 
of the proceeds of industry is actually distributed. 
This seems like injustice ; but it must be remem- 
bered that it is chiefly public and administrative 
services that are compensated b}^ salaries and fees. 
In an}' productive enterprise, — a woolen-mill or 
watch-factor}', for instance, — a wise and vigorous 
executive administration is essential to make the 
business profitable. It is for the interest of every 
one in the establishment who receives wages, that, 
for the place of high trust, the best talent should 
be secured by a salar}' sufficient to command it. 
8o, too, all private interests are promoted when 
public affah'S are guided by men of ability and iuteg* 



88 POLITICAL ECONOMY. 

rity. For offices of government, which require men 
of more than ordinary capacity, it is right, there- 
fore, that more than ordinary compensation should 
be provided. 

The apparent injustice is entirely relieved, if the 
way is open for every one to malve the most of him- 
self, and to rise in position and emolument accordr 
inof to his real merit. This is illustrated in the case 
of George Stephenson. He began his career as an 
engine-boy at the lowest wages. As his mechani- 
cal genius was developed, he was made an engine- 
wright, and put upon a salar}- of a hundred pounds 
a year, when he thought his fortune was made. 
But by patient study and labor he invented the loco- 
motive-engine, and became " the father of railways." 
Then the services of his later 3'ears received munifi- 
cent remuneration. The world, enjoj'ing unspeak- 
able benefits from his achievements, pronounces that 
remuneration justly and worthil}^ bestowed. 

In the learned professions, especiallj^ those of law 
.and medicine, men of highest ability and repute 
receive extraordinary remuneration, simply because 
such men distance competition and custom. Where 
great interests are at stake, it is sound economy to 
employ the best legal talent at any price. In a 
crisis of life or death, the best medical counsel is 
cheap at any cost. After the reputation has been 
achieved, lawj^ers like Webster and Choate, and 
ph3'sicians like Mott and Parker, would be over- 
tvhelmed with business if they did not limit it by 
high charges. It is not unusual for members of 
these professions to agree upon a scale of fees to 



REMUNERATION OF LABOR. 89 

be charged. But such agreements can fix onl}- the 
minimum limit, leaving an open range above for 
compensation to be increased according to each 
one's ability and reputation. These higher rates 
are the prizes which stimulate the efforts of 3'oung 
aspirants in these professions. 

The difference of remuneration is most marked 
in the departments of literature and fine art. A few 
lines from the pen of a Bryant or a Longfellow, a 
few strains of music from a Jenny Lind or a Kel- 
logg, a painting done by a Church or a Bierstadt, 
a statue from the chisel of a Thorwaldsen or a 
Powers, command prices that seem to common folk 
absurdl}^ extravagant. But these "products are in- 
imitable fruits of highest genius, which sets those 
who have it above all competition, in the enjoj'ment 
df an unrestricted monopoly. 

Generallj' men in all callings and professions in- 
sist on the highest remuneration they can command. 
But often the honor, dignitj', and permanence of 
certain positions are considerations of weight on 
the other side. Thus a lawj'er, whose practice 
would 3'ield an income of twentj^-five thousand dol- 
lars, ma}^ accept a place for life on the bench of 
the United vStates Supreme Court at a salary- of ten 
thousand dollars. 

Men devoted to scientific research, clerg3mien, 
and teachers, are, as a whole, confessedh^ under- 
paid, when compared with men of equal ability and 
attainments in other professions. But with many 
of them, delight in the study of truth, and devotion 
to the work of Christian beneficence for the well* 



90 POLITICAL ECONOMY. 

being of mankind, which find satisfaction and joy 
in the service itself, go far to balance, in their esti- 
mation, the meagreness of their pecuniary reward. 

The reniuneration for wonien's labor in most 
emplo3'ments is less than that of men for similar 
services. The fact is apparent on every hand. In 
present circumstances, the following reasons,, though 
they may not altogether justify it, account for the 
fact. 

1 . It is a prevalent opinion, that for miscellaneous 
labor, women are by physical and mental constitution 
inferior to men in the qualities essential to highest 
efficiency. In the spinning-room of a cotton-fac- 
tor}^, men are emplo3'ed almost entirel}', because 
women have not the strength to handle the jennies. 
In the weaving-room, two or three men work with 
a hundred women. The women tend the looms as 
well as, or better than, the men ; but for oversight, 
the men are needed to meet exigencies for which 
women are supposed to be unequal. 

2. In the order of nature and in the constitution 
of society, the sphere of activity for most women is 
ordained to be in the home, each the solace and 
help of a husband, and the nourisher and mentor of 
their children. This fact tends to rule out women 
from manj^ occupations, and to create the impres- 
sion that it is unwomanly to enter them. 

3. The wages of men are adjusted to the presump- 
tion that each has or will have a family to provide 
for ; and those of women, to an anticipation that each 
will in due time, by marriage, be relieved of her own 



REMUNEKATION OF LABOR. 91 

support. A very large proportion of the women 
who to-day depend on their own labor are 3'oung 
persons who are passing, one after another, into ne\1 
relations, where they are to be cared for by men's 
earnings. 

4. Productive industry is now organized on the 
assumption that vs^onien's work is to receive less com- 
pensation than men's. In most cases, the greater 
cheapness of female labor is the chief reason for 
employing it. The prices of all commodities into 
which this kind of labor enters are diminished there- 
by. If the rule is a false one, it cannot be suddenly 
changed without deranging the entire sj'stems of 
production and exchange. 

5. There are feminine instincts which prompt 
w^omen to draw back from many occupations because 
they are coarse, or involve too rough jostling w^ith the 
world. These instincts are natural ; and when they 
are crushed out, the charm of womanhood is gone. 
Yet the prevailing tendenc}^ is to make them excess- 
ive, so as to produce a morbid sentiment of false 
delicac3\ 

The foregoing considerations limit the number 
of occupations open to women ; and these are so 
crowded, that competition is intense, and low wages 
are inevitable. 

6. This competition is made sharper by the fact 
that many vv^omen w^ho seek employment are partly 
or w^holly supported by other resources than their 
own labor. These can and often do underbid 
others who have nothing but their wages to depend 
on. Not infrequently, too, the fact of then* better 



92 POLITICAL ECONOMY. 

circumstances, their better appearance, and, it ma^ 
be, their superior intelligence, secures for them the 
preference. 

Notwithstanding all this, there are exceptional 
cases even now, where women of superior energy 
or genius command for their ser\dces a remunera^ 
tion equal to that accorded to men for like work. 
This is especially true of women's work in fine art. 
The female stars in music and the drama, such as 
Kellogg and Siddons ; in painting and sculpture, 
such as Rosa Bonheur and Harriet Hosmer ; in 
poetrj^ and light literature, such as Mrs. Browning 
and Mrs. Stowe, — receive from an admiring public 
ample compensation for their productions. Occa- 
sionall}^, too, a woman possessed of great executive 
ability for managing business wins for herself a 
full reward. But these exceptions are so few as to 
prove, rather than controvert, the rule. 

As the case now stands, good judgment mu3t 
accept the following conclusions : — 

a. In the nature of things, there are reasons 
why, in general, the remuneration for women's work 
should fall somewhat below that of men. Absolute 
equality between the sexes in this respect is not 
likely to be attained. 

b. This inequality, as a present matter of fact, is 
much greater than is either right or necessar3\ The 
distress that comes from it cries out in the name of 
justice and philanthropy for relief. 

c. The needed relief can come onty as the sphere 
of competition is widened, and its intensity relieved ^ 
by opening for women free access to all fit occupa* 



REMUNERATION OF LABOR. 93 

tions. The chief obstacle to this is the ban imposed 
by women themselves on one another, under the 
t3Tanny of fashion and prejudice and mawkish sen* 
timentahsm. There is no good reason why with 
women, as with men, honest work well done should 
not be alwa3's respected and honored. A change 
of opinion on this j^oint, in female circles, will be a 
change of public opinion. 

d. In the quiet sphere of domestic life, woman 
renders to society her noblest, most blessed service, 
— a service whose worth cannot be estimated in 
terms of current money. Her position of queenly 
power in that sphere must ever be carefull}^ guarded. 

On the whole, the outlook of to-day is full of 
hope for the success of a conservative reform, which 
shall correct existing wrongs without impairing those 
most sacred rights of woman which centre in the 
home. 

EXERCISES. 

1. Why pay a glass-blower for five hours' work more 
than a porter in the same establishment for a whole day ? 

2. Wliy are extraordinary wages paid to men who work 
at rolling iron ? 

3. Why do men working in a powder-mill expect higher 
wages than they would ask in a llouring-mill ? 

4. If a man spends five years learning the engraver's 
art, how is he to be compensated for his outlay of time and 
money ? 

5. Illustrate how a trustworthy character may have ^ 
money-value. 

6. Wliy is a higher price charged for a coat made to. 
order than for one of a wholesale stock ? 

7. Why are the wages of a locomotive-engineer highet 
than those of a fireman whose work is harder ? 



94 POLITICAL ECONOMY. 

8. If seven out of ten who study law fail of success, 
what inducement is there to seek the profession? 

9. Wliy is it right that the general scale of salaries 
should be higher than that of wages ? 

10. On what grounds may an eminent surgeon charge a 
fee of a thousand dollars for an operation which occupies 
but two hours ? 

11. Is it unjust for an artist like Powers to ask what he 
will for the products of his genius ? 

12. Is it wrong for a clergyman to change his place for an 
increased salary ? 

13. Why do women prefer to live in a garret, and earn a 
pittance with the needle, rather than to go into domestic 
service in comfortable homes at good wages ? 

14. What would be the consequences, good or bad, if the 
salaries of female teachers were made the same with those 
of males of the same grade ? 

15. Is it desirable that women should engage in field- 
Ol^ork, or in tiJae- X&^p) 'srof ession ? 



REMUNERATION OF CAPITAL. 95 



CHAPTER II. 

THE REMUNERATION OF CAPITAL. 

Justice requires that the owner of capital 
should be compensated for its use. Capital is 
a necessaiy partner with labor in the production of 
wealth. Its two most important forms are : first, 
the "plant," i.e., the buildings, tools, and machinery 
to work in and to work with ; and, second, the mate- 
rials to work upon. Labor and skill can do nothing 
till these are provided. 

Capital is the fruit of past labor preserved b}' 
self-denial. One's right of property in that which 
he has earned and saved is the same as his right 
to his present power to labor. No man expects to 
put forth his powers in present labor without some 
reward. Why should one be expected to give the 
use of the fruits of his past labor and self-denial 
without reward? The hope of such reward is the 
special inducement to dihgence and saving. Su\> 
pose James Brown has health and strength and skill 
as a blacksmith, but no shop, no tools, no iron. 
John Smith has by previous labor and thrift become 
the independent owner of a shop and its appurte- 
nances, but, broken in health, is unable to work. 
Each is helpless without that which the other can 
furnish. Both will derive advantage from the union 



96 POLITICAL ECONOMY. 

of these two properties, the power to labor, and the 
capitaL This union may be effected in either of 
three waj^s, — Smith ma}' hire Brown to work with 
his shop and tools and iron, and pa}" him wages, 
taking the surplus of the proceeds for himself; or 
Brown may hire Smith's shop and tools, and pay 
him rent for their use, taking for himself the sur- 
plus of all he can earn ; or Brown may buy of 
Smith the shop and tools, giving him, since he has 
no money, a note and mortgage for their value, on 
which he is to pay interest every year. Can any- 
body question the rightfulness of either of these 
transactions? They are but three modes of doing 
one and the same thing, — that is, of bringing labor 
and capital into partnership. The first establishes 
the relation of employer and employe ; the second, 
that of landlord and tenant ; the third, that of 
creditor and debtor. Each involves a simple shar- 
ing of the joint product of industry. 

This simple case illustrates the equitable grounds 
of the remuneration of capital in all its aspects. 
The principle is the same, if Brown borrows money 
for the purchase at the bank, and pays the interest 
there ; or if ten persons contribute means for the 
purchase, and so make a stock company, each to 
receive dividends on the profits of the business 
instead of interest. 

For the fuller presentation of the subject, it may 
be considered under three heads; viz., Rent, Inter* 
est, Dividends, 



RENT. 97 



SECTION I. — RENT. 

Rent is the compensation paid for the use of land 
and its appendages, commonly called real estate.. It 

implies ownership of land, and a right on the part 
of the owner to receive a compensation for its use 
when he lets it to another. 

In Great Britain and other countries, where the 
influence of the old feudal S3-stem is still felt, the 
problems of rent are man}' and complicated, because 
the titles to lands are encumbered by entails and 
mortmains. But in our country lands are held in 
fee-simple, which makes the ownership absolute, and 
/he transfer by sale or lease eas}' and simple. 

For agricultural purposes, the amount of rent 
which land will command must depend mainly on 
its productiveness, which is determined b}' the fer- 
tility of the soil, and the situation with reference 
to a market for the produce. Fertile lands near to 
a good market command the highest rent, because 
the farmers are assured of both good crops and 
good prices. With reference to a new country 
inland, the opening of railwaj's and other facilities 
for tranportation enhances rents : first, hy virtually 
bringing the lands near to the old markets ; and, 
second, bj' faToring the emigration of population to 
build cities and develop varied industries, and so 
to form new markets. 

Beaut}' of situation, good neighborhood, and prox- 
imity to schools and churches, are also minor con- 



98 rOLITICAL ECONOMY. 

siderations of more or less weight in determining 
the rents of agricultural lands. 

In this countr}'^, farms are quite commonly rented 
" 071 shares; " that is, the landlord receives in com- 
pensation for the use of his land a certain propor- 
tion of the crops. The capitalist thus shares with 
the laborer the risks as well as the i^rofits of the 
business. 

In cities, rents for lots and buildings are deter- 
mined almost entirely by location, with respect to 
centers of business, the character of the neighbor- 
hood, and the freaks of fashion. A store in the 
center of business will rent for much more than one 
half a mile off, because a merchant there will sell 
ten times as many goods as in the other location. 
A residence in a respectable or fashionable quartet 
of the city commands the highest rent, because it 
secures pleasant surroundings, or gratifies pride and 
vanity. Witli the growth of cities, the centers of 
business and the fashionable quarters are subject 
to change from time to time, so as materially to 
varj^ the rent-value of property ; and this fact needs 
to be considered when capital is invested in that 
form. 

Generall}', except in the faA^orite locations of 
great cities, rents are fixed at a lower percentage on 
the market value of the property than the average 
rate of profits from business, and less than the 
average rate of interest. The chief reasons for this 
are the greater security of capital in real estate, and 
the probabilitj^, that, with the advance of societ}', 
the value of real estate will be increased. Property 



RENT. 99 

in land cannot be run away with, nor destroj^ed, nor 
fraudulent!}'- disposed of; and not infrequently, by 
the mere rise of value, a small capital in this form 
grows into a fortune. 

EXERCISES. 

1. What would be the effect on industry if a rule were 
established, that an owner of capital could have no com- 
pensation for its use when loaned to another ? 

2. Under such a rule, which would suffer most, laborers, 
or capitalists ? 

3. If it is right for one to borrow capital for his own 
advantage, is it wrong for the lender to claim a share iu 
that advantage? 

4. What does the term " real estate " include ? 

5. Could the resources of the earth be developed to 
advantage, if there were no private property in land ? 

6. Why will a poor farm near a seaport command higher 
rent than one of richer soil a hundred miles away ? 

7. How has the opening of railways to the West affected 
the value of New-England farms ? 

8. Why does the character of its neighborhood affect 
the value of a farm ? 

9. Illustrate the great inequalities in the rate of rent for 
city property, and the reasons therefor. 

10. Why should the average rent for real estate be but 
five per cent on its value, when the average interest for 
money is eight per cent ? 

11. Can you give an instance, and the facts, of a fortune 
made by the purchase and management of real estate ? 



100 POLITICAL ECONOMY. 



SECTION IL— INTEREST AND DIVIDENDS. 

Interest is the compensation paid for the use of 
capital estimated in money. This is to be preferred 
to the more common definition of interest as " the 
pi'ice paid for the use of money," because it covers 
the whole ground. Money as the medium of ex- 
chansje is the most convenient form in which loans 
can be made. When credit is extended'in any wa}', 
the value is set down in terms of mone}'" on which 
interest may be reckoned as the parties agree, or as 
the law ma}^ prescribe. But it should alwa3'S be 
borne in mind that what the borrower wants is not 
the mone}^, but the capital which it represents, or 
for which it is immediately expended. 

Thus one ma}- huj land for a site, and have a 
building erected on it, and purchase a steam-engine 
and machiner}^ for a mill, and cotton to be worked 
up, at each step giving his note for a part of the 
Value, to be paid at a future date with interest. Or, 
instead of doing this, he may borrow of a friend or 
at the bank money enough to meet his deficiency, 
giving his note for the whole with interest ; and then 
iet up his establishment complete, b}" purchases 
made for cash. The transactions are essentialh' the 
same. In th^ first case, the loan is made of the 
capital directl}^, without passing any mone}' ; in 
the other case, the money is only a means of reach- 
ing the capital. The land, the mill, the engine, the 
inachinery, and the cotton ai?e what the manufacturer 



INTEREST Am) DrVTDEJ^TDS. 101 

wants, and what he actuall}^ borrows as capital for 
bis business. 

Interest is reckoned at a certain per cent of a 
certain value defined in terms of mone}', which is 
called the principal. The percentage is called the 
rate, and is usuall}^ stated as the rate per annum, 
though often paj^able at shorter intervals than a 3'ear. 

The word interest is a Latin verb, and means, "it 
is of advantage." The term implies a mutual advan- 
tage to borrower and lender, and thus reqognizes 
the natural and necessary partnership of capital and 
labor. It is for the advantage of the skillful laborer 
to borrow, at a reasonable interest, as much as it is 
for the advantage of the capitalist to loan. Were 
there no money-lenders, there could be no money- 
borrowers ; and, were there no mone^'-borrowers, the 
industrious artisan would be the greatest sufferer. 
The parties come together for their mutual advan- 
tage. Why, then, should it be thought an}- more 
odious for one to lend for his own advantage, than 
for unother to borrow for his own advantage ? So 
far as the transaction itself is concerned, both must 
be regarded as equally honest and honorable. This 
mutual advantage marks the chief difference between 
a loan and a gift. A gift implies benevolence: a 
loan implies interest. A giver sacrifices his own 
advantage for the benefit of the receiver : a lender 
and a borroV'iCT confer each a benefit on the other, 
adjusted as equitably as possible. Lenders are 
Bometimes ©Varicious, exacting, oppressive. So, 
too, bfwrow^rs are sometimes profligate, negligent, 
fxsLUi^nhtPt: These are abuses which selfishness 



102 POLITICAL ECONOMY. 

thrusts into this, as into all business transactions. 
They should not impeach the legitimacy of the 
transaction itself rightly conducted. 

Some people think it wrong that interest should 
be taken, because under the name usury the Scrip- 
tures denounce it, and our Saviour prescribes it as a 
rule of Christian love, that men should lend, hoping 
for nothing in return. But the cases contemplated 
in the Scriptures are loans made to relieve pressing 
necessities of the needy, not loans of capital made 
with a view to profitable industr3\ The law of 
Christian charit}^, which bids us give to the poor, 
looking for no return of either principal or interest, 
is still binding ; but it does not apply to loans which 
are only a means of uniting labor and capital in a 
common enterprise, for their mutual advantage. It 
seemed necessary to say so much to correct certain 
false ideas which are put forth and are gaining cur- 
rency in these days. Interest, properly understood 
and regulated, involves no extortion, works no in- 
jury, but confers great and important benefits, by 
encouraging both saving and the judicious employ- 
ment of capital saved. 

The Rate of Interest is determined chiefly by 
four considerations, viz., risk, convenience of invest- 
ment, profits of industry, and the ratio between sup- 
ply and demand of capital. 

1. Risk. When one makes a loan, he puts a 
portion of his property out of his own hands into 
the control of another. There is a chance that it 
may never come back to him. His compensation 



INTEREST AND DIVIDENDS. 103 

must be proportioned to that chance. If he holds 
pledges which make him secure, he will be content 
with a small interest ; if he has no securit}', and the 
borrower proposes to embark in a doubtful enter- 
prise, he can be induced to make the loan only b^ 
the promise of a large compensation. 

The risk depends upon several circumstances. 

a. The personal character of the borrower qualifies 
the risk. The character that can safely be trusted 
involves industry and sobriety, skill, good sense, 
pecuniar}^ abilit}^, and moral integrity. AVhere these 
are combined in the borrower, the probabihties are 
strong that he will succeed, and honestly fulfil? hU 
promise to pay ; and the lender runs but little risk. 

b. The character of the business in which the bor. 
rowed capital is to be emplo3'ed affects the risk. 
Capital invested in a powder-mill is in great danger 
of sudden destruction ; in farming operations it is 
almost absolutely safe. Money loaned to a specu- 
lator in mining-stocks is put into bubbles that a 
breath ma}' burst ; loaned to an industrious me- 
chanic, it ma}' not move so fast, but it is sure to 
come around in time, with increase. 

C. The character of the government affects the risk 
incurred in lending capital. A despotic government, 
which plunders its citizens b}' irregular and oppres- 
sive taxation, makes all private propert}- and all 
industry insecure. Thus in a countr}^ like Turkey 
a great risk attends all pecuniary contracts, and the 
rate of interest is high. Where the laws are bad, 
or are inefficient to maintain justice, for lack of 
force in their execution, there is great risk in loaning 



104 POLITICAL ECONOMY. 

capital. We do not wonder that in mediaeval timea 
the Jewish money-lenders charged enormous rates 
of interest, when we understand that the laws fur- 
nished no safeguards for their protection : tlie}' and 
their contracts were subject to the caprice of petty 
lords, who were little better than robbers b}^ pro- 
fession. So, too, the stability of a government is 
an important consideration. A revolution often 
dissolves contracts, dissipates securities, and renders 
obligations valueless. Hence in Mexico the rate of 
interest is very high, while in Great Britain it is 
very low for both public and private loans. 

2. The convenience of the investment has an im- 
portant bearing on the rate of interest. Three 
points have here to be considered. 

a. Facility of transfer. One who loans his capital 
Jikes to have it so invested that he can easily com- 
mand it for his own use in case of need. A bond 
of the United States, or a certificate of stock in a 
well-established bank, may be easily transferred and 
made available. 

h. Permanency of investment. A lender at the 
same time desires that a good investment should run 
on undisturbed as long as practicable, unless he has 
occasion to recall his capital. A government-bond 
that runs twenty 3'ears will for this reason be taken 
up at a less rate of interest than one that runs only 
five years. 

C. Punctuality in the payment of interest. Those 
who loan their capital wish to count with certainty 
on their interest, and to secure it without trouble. 
A well-secured bond, with interest-coupons attached. 



INTEREST AND DIVIDENDS. 105 

given b}' a prompt business man, will ordinarily 
command money at a low rate of interest, because 
of this convenience. 

British consols, which represent the consolidated 
debt of England, run at from three to four per cent 
ntcrest, because they combine these three advan- 
tages in the form of investment the}^ offer. For the 
same reason our United-States bonds are eagerly 
bought up at a premium, though they bear only fom* 
or four and a half per cent interest. 

3. The profits of industry vary at different times 
and in different countries, and affect the rate of 
interest. Here we look at the matter from the 
standpoint of the borrower. He must consider 
what he can afford to pay, and that evidentl}^ must 
depend on the profit he can gain by the use of capi' 
tal. If, as sometimes happens, a business 3'ields sc 
large profits that the capital is doubled in a year, 
one can well afford to pay twenty-five or even fiftj 
per cent for capital to be emploj^ed in such a busi- 
ness ; whereas, if through any cause a particular 
industry yields only three per cent of profit, one 
cannot afford to pa}^ even six per cent for capital to 
be embarked in that business. 

4. The ratio between supply and demand of capital, 
more than any other one cause, determines the rate 
of interest. This is onl}^ a recognition of the 
principle of competition acting here as elsewhere. 
When the number of borrowers is large, and their 
wants are large, but the amount of capital available 
is small, the competition is sharp on the side of the 
borrowers, and they bid up on the rate of interest. 



106 POLITICAL ECONOMY. 

When the conditions are reversed, the competition 
is sharp between the lenders, and they bid against 
each other by offering loans at lower rates of interest. 

The best adjustment of supply and demand de 
pends on the freedom of capital ; that is, the unfet 
tered liberty of ever}^ man to employ his capital in 
any innocent way he pleases. Such freedom tends 
always towards a healthful equilibrium, which sup- 
ports industrj" by securing to both partners a fair 
and satisfactory rewai"d. 

In a new and prosperous country interest is al- 
ways high, because the profits of industry are large, 
and the suppl}' of capital on the ground is small, 
while to distant capitalists the risk seems great. 
But the constant tendency of civilization is to re- 
duce the rate of interest, because wealth increases 
rapidly both b}^ immigration and by the natural 
fruits of industr}', and because risk is diminished 
by more perfect securities. This process goes on 
b}' certain fixed laws. The natural development is 
iiealthiest. The action of those laws is only marred 
and hindered by the untimely interference of legis- 
lation. 

Usury Ijaws. These are laws designed to restrict 
the rate of interest by a defined limit. Thc}^ inter- 
fere with the freedom of capital, and are in conflict 
with the first principles of sound political economy, 
as several considerations show : — 

1. They violate a right of property. A man has 
the same right to the market-rate for the use of his 
capital in monej^, as he has to the market-rate foi 



INTEREST AND DIVIDENDS. 107 

the rent of his house, or the hire of his horse, oi 
the charter of his ship. 

2. The civil law cannot fix a price for the use of 
capital, ail}" more than it can fix a price at which 
flour, or iron, or an}- other commodity, must be sold. 
In all these matters, the law of competition is supe- 
rior to the civil law. 

3. The price of capital is more variable than that 
of other commodities. This is made evident in the 
great marts of business, by dail}' quotations of the 
rate of interest. 

4. These laws, instead of diminishing, actually in- 
crease the burden of interest to the most needy bor- 
rowers. The lender must be compensated for the 
additional risk from the penalt}' of the law. 

5. Such laws are never fully enforced, as is obvi- 
ous from the dail}^ newspaper reports just referred 
to. Men who want money will pay what the}' please 
for it, and those who have it to loan will get what 
the}" can. Such laws onl}' put law-abiding capital- 
ists at a disadvantage, or drive them out of the 
market for the benefit of unscrupulous sharpers and 
Shy locks. 

Money is a necessity of life in active industry 
and trade, and for that reason it ought to be left 
free to the action of the natural law of supply and 
demand. In active commercial centres this is com- 
ing to be understood. Every State should have a 
statute defining a legal rate of interest for cases 
in which the contract indicates no specific rate. 
Be3'ond this, legal sanction and securit}" for all 
reasonable contracts in loaning capital, under free 



108 POLITICAL ECOI^OMY. 

competition, constitute the surest safeguard against 
excessive interest. It is a hopeful sign th^t in 
Great Britain, and in Massachusetts and other 
American States, usury laws have been abolished. 

Dividends. This term denotes the remuneration 
of capital invested in stock companies. These com- 
panies unite contributions of capital from a number 
of persons for large operations, such as cotton or 
woollen factories, banking, insurance, railways, tele- 
graphs, &c. The whole capital is divided into 
shares, usually of one hundred dollars each, which 
are freely bought and sold in the stock-market. 
With a company honestly managed, as the business 
runs on, accounts are balanced semi-annuall}- , and 
the proceeds are ascertained. The surplus of these 
proceeds, after providing for all expenses, and laj'ing 
aside a reserve to meet emergencies, is divided to 
the stockholders, giving a certain percentage to each 
share. 

This form of compensation for the use of capital 
is marked by two peculiarities : First, the remunera- 
tion depends altogether on the success of the industry 
in each case. Second, the dividend embraces two 
|elements ; viz., interest and profits. If the mill, the 
tailwa}^, or whatever, has barel}^ paid other expenses, 
capital will have no remuneration ; if it has earned 
enough to pay the capital ordinar3^ interest, the 
dividend is identical with interest ; if it has earned 
more, so as to make dividends of ten or twenty per 
cent annually, the capital receives extraordinary 
remuneration. The chance or expectation of such 



INTEREST AISTD DIVIDENDS. 109 

extraordinary remuneration, and the convenience of 
investments in that form, are the chief inducements 
for putting capital into stocks. 

The mismanagement, frauds, and defalcations 

*rhich attend the operations of stock-companies, 

nvolve great sacrifices. A careful estimate of the 

results of such investments would probably show 

average returns much less than ordinary" interest. 

EXERCISES. 

1. Show the rightfulness of interest in the case of a 
farmer, who, growing old, sells for ten thousand dollars 
the farm he has worked for forty years, and loans the 
money at eight per cent, expecting the interest to support 
him for the rest of his days. 

2. Illustrate the advantage to a young skilled mechanic, 
of borrowing capital to set him up in business. 

3. If a manufacturer sells a farmer a reaping-machine, 
taking his note for. payment to be made in three annual 
instalments, why is it right to charge interest on the de- 
ferred payments ? 

4. Why should a grocer sell his goods at a less price for 
cash than if he gives the buyer six months' credit without 
Interest ? 

5. If it is right for a machinist to take a note with inter- 
est in part payment for a steam-engine, is it wrong for a 
banker to take a like note with interest, for money loaned, 
that the buyer may pay for the engine at once ? 

G. What considerations induce capitalists to prefer to 
invest in government bonds which pay four and a half per 
cent, rather than in notes and mortgages at eight per cent ? 

7. "Why is it that the government of Chili can hardly 
borrow money at ten per cent, while the British govern- 
ment borrows all it needs at three per cent ? 

8. How could a poor man, who in 1843 pre-empted gov* 
emment land in Wisconsin at $1.25 per acre, afford to pay, 



110 POLITICAL ECONOMY. 

a year after, fifty per cent interest for money to complete 
his purchase of the government ? 

9. What reasons combine to cause a high rate of inter- 
est in our young Western States ? 

10. Account for the decline of interest in Illinois since 
1840, from twenty-five per cent to eight per cent. How 
much has direct legislation done to cause that decline ? 

11. When is a high rate of interest a sign of prosperity ? 
when of adversity ? 

12. State some of the ways in which usury laws are 
evaded. What is the moral effect of laws thus openly 
disregarded ? 

13. Can a stock-company he justified in declaring divi- 
dends not earned, and borrowing money to pay them ? 

14. Why are stock-companies specially exposed to frauds ? 

15. What do you understand by the " bulls " and " bears " 
of Wall Street ? 



DISTRIBUTION OF PROFITS. Ill 



CHAPTER III. 

DISTRIBUTION OF PROFITS. 

Writers on Political Economj^ have used the term 
profits with much looseness and ambiguity'. Many 
define it to mean the remuneration paid for the use of 
capital. Mill sa3'S profit embraces the three items, 
interest, insurance, and wages of superintendence. 
Mr. Walker represents profits as the share which 
falls to the employer or manager. This loose and 
varied use of an important term is not scientific. 
Our science requires the term with a specific mean- 
ing, properl}^ expressed, we think, in the following 
definition : — 

Profits are the net proceeds, — the surplus of 
values, after all necessary expenses of production 
have been deducted. 

According to the principles laid down in previous 
chapters, the following items are to be included in 
necessar}' expenses : — 

1 . Wages paid for common and skilled labor of all 
grades. 

2. Salaries paid for oversight and management, 
including all superintendence and administration, 
mechanical and financial. 

3. Interest on capital invested. 

4. Insurance to guard against certain risks. 



112 POLITICAL ECONOIMY. 

5. Taxes paid for protection from the government. 

If the products of an industrial establishment 
provide for these expenses, and nothing more, the 
business just sustains itself, but it jields no profits. 
In such a case, since all parties get their legitimate 
compensation, they ma}' be satisfied to run on so 
for 3'ears. But in general the expectation of profits 
is the necessary stimulus of enterprising industr}', 
and the aim is to make profits as large as possible. 

When one combines in himself the functions of 
operative, manager and capitalist, wages, salarj^, 
interest and profits if there be an}', all come to 
him. No question of distribution arises ; but even 
in such a case, it is well for one to keep his accounts 
so as to define what is properly to be reckoned as 
wages for labor, salary for management, and inter- 
est for capital : only so can the profits of the busi- 
ness be accurately estimated. 

Though a common usage, it is yet a serious error, 
to express the measure of profits in a business, by a 
percentage on the capital invested, as though the 
profits belong exclusively to the capitalist. In many 
cases, the labor is of more account than the capital. 
A shoemaker with a capital of five hundred dollai-s 
ma}^, by untiring industr}^ through a year, make his 
proceeds count a hundred per cent on that amount, 
and 3'et receive an insufficient return for his labor. 
Twenty per cent on five hundred thousand dollars 
invested in a great manufacturing establishment 
may pay well for labor and management and ordi- 
nar}^ interest on capital, with a large margin for 
profits. Hence it is often better for one to work 



DISTKIBUTIOJf OF PROFITS. 113 

for wages or a salary- in connection with a large 
establishment, rather than attempt an independent 
business. So with truth is it said, "It is in the 
nature of trade and manufacture that great capital 
drives small capital out of the field : it can work for 
smaller returns. ' ' 

It is evident that, according to our definition, 
profits can be legitimately increased only in one of 
two wa3'S, either by reducing expenses, or by increas- 
ing the amount and the value of the products. It is 
for a wise and faithful manager carefully to study 
both sides of the problem ; and hence his is the 
most important service, and it deserves the highest 
compensation. But it does not follow, therefore, 
that the entire profits should be appropriated to the 
manager, or ''''entrepreneur^^' as the French term 
him. 

• 

For a fair distribution of profits, there must be 
combined with these views of the nature of profits, 
a full recognition of that partnership which we have 
seen to be a fundamental principle of productive 
industry. In this partnership there are three mem- 
bers, — the capital, the executive capacity, and the 
labor. Each is entitled to a fair compensation for 
the service rendered, and each is entitled to a share 
in the surplus fruits of their co-operation. We may 
not say either an equal share or equal compensa- 
tion ; because capital takes the greater risk, and is 
liable to the heaviest losses, and it is fair that this 
chance of greater loss should be balanced by a 
diance of greater gain ; because, also, the amount 



114 POLITICAL ECONOMY. 

of profits is due chiefly to the executive wisdom and 
energy of the manager, and he is entitled to a pro- 
portionatety larger share in the returns. After due 
allowance for these considerations, however, there 
is a share which justly belongs to the labor, and 
which should be distributed among those who make 
up this third member of the firm, according to each 
laborer's merit and ^ade in the ser\ace rendered. 

The rising antagonism between labor and capital 
will be best counteracted, we believe, by measures 
adapted to secure a fairer distribution of profits on 
this basis. To devise the best measures for this 
will require much earnest stud}", and experiments 
carefully conducted with good-will and patience ou 
both sides. No doubt it will be found that meas- 
ures must be varied to suit different cases and cir- 
cumstances. What works well in one case ma}'' not^ 
do so in another. Tact and common/ sense must 
be used to apply the principle which is one and, 
common. There are obstacles in the waj of the 
immediate adoption of such measures. False ideas *' 
on the part of both workmen and their emploj'^ers. 
must be corrected, mutual confidence must be estab- 
lished, and common usage must be change'd. These 
are things not to be accomphshed in a day. Yet 
there is good reason to beliove that if attention is 
turned earnestly on the study of this specific object, 
obstacles will be overcome, measures will be defined 
and successfully applied, and the result will be more 
of justice, harmony, and eflSciency, in the actual 
operations of industry, and abiding relief from dan- 
gers which threaten the peace and prosperity of the 
nation. 



DISTKIBUTION OF PR0FIT13. 115 

Co-operative associations are desired to secure a 
more equitable distribution of profits in the interest 
especiall}' of workmen. Their ordinarj' plan is for 
a number of workingmen of some one branch of 
industr}' to join their means and their hands t* 
carr}^ on business, expecting to divide the entirt 
proceeds among themselves by some defined rule of 
equity. Some such organizations have succeeded 
for a time, but most of them have soon ended in 
failure. The reasons are obvious. There is apt to 
be a deficiency of capital, which puts the associa- 
tion to a disadvantage in competition with other 
estabhshments. Again, jealousies among the mem- 
bers are apt to spring up, and prevent the harmony 
and unity of action which are essential to best 
results. A greater diflSculty is to secure the man- 
aging abilit}'^, on which, after all, success mainly 
depends. A majoritj^-vote in mass-meeting cannot 
fulfil the function of a "captain of industry" of 
judgment and will-power to plan and direct. Such 
associations, it has been said, aim to dispense with 
the " entrepreneur^^' and divide his' proper remuner- 
ation. This means onl}^ that the laborers are tr3'ing 
to appropriate all the profits to themselves, which 
involves essentially the same mistake as when the 
capitalists or managers try to take the whole. The 
partnership heartil}^ entered into, vigorousl3' main- 
tained, and so conducted as to insure the rights of 
each class of members, is most likel}^ to estabhsh 
an equitable distribution of profits. 



116 POLITICAL ECONOMY. 

EXERCISES. 

1. A cabinet-maker with a capital of $15,000 employed 
six men, tlie average of whose wages was $12 each per 
week; paid a bookkeeper a salary of $600, and managed 
the business himself. He paid for rent, taxes, and insur- 
ance, $1,200, and legal interest was seven per cent. After 
replacing capital consumed, the proceeds of the business 
for a year amounted to $12,000. Allowing $2,000 for his 
compensation as manager, what were the profits for the 
year ? 

2. For the subsequent five years the proceeds averaged 
$15,000 per year, and ten per cent of the profits were annu- 
ally distributed to the employes in addition to wages and 
salary: what amount of profits fell to each of the parties 
during that period ? 

3. The next year, by sharp competition, increased cost 
of lumber, and dull trade, the proceeds were reduced so as 
barely to meet expenses, as before defined : why would it 
be worth while to keep on in such a case ? 

4. Then came a financial revulsion ; and for three years 
the proceeds annually came $2,000 short of meeting ex- 
penses, and the pay of all emjjloyes was reduced ten per 
cent: what was the actual loss to the several parties? 

5. With the return of better times, $5,000 added capital 
was invested in the introduction of steam-power and 
machinery, by which the annual products were doubled 
in amount; and for the next five years the annual proceeds 
rose to $20,000: what were the annual profits? Distributed 
as before, what share fell to each of the parties ? 

6. Estimate the profits of the business for the whole 
period of fifteen years. 

7. If the whole establishment had been burned up at the 
time of greatest depression, with insurance to the amount 
of only two-thirds the value, whose would have been the 
loss ? 

8. Suppose a blacksmith, working by himself with a capi- 
tal of $300, earns in a year $400 : has he made any profits ? 

9. If a great cotton-factory produces annually 20,000,000 



DISTRIBUTION OF PROFITS. 117 

yards of cloth, and the superintendent contrives to reduce 
the cost of production one mill per yard, how much will 
the profits thereby be increased, supposing prices are un- 
changed ? 

10. The cost of production remaining the same, suppose 
the market-price to advance one cent a yard: how much 
will the profits be increased ? 

11. What effect on the efficiency of labor, and economy in 
the use of materials, may be expected from allowing labor- 
ers a share in the profits ? 

12. State the main features of any co-operative associa- 
tion you know of, and its reeultfl. 



118 POLITICAL ECONOMY. 



CHAPTER IV. 

REVENUES OF THE GOVERNMENT. 

Good government, efficiently administered, is 
essential to prosperous industry and social enjoj- 
ment. Everj^ citizen derives a benefit from such a 
government, and may fitly be called on to contribute 
a portion of his wealth for its maintenance. The 
government represents a common public interest 
superior to any private interest : its claims there- 
fore justly take precedence of all others. Since the 
public revenues must be drawn from the proceeds of 
a people's industry, the consideration of this topic 
comes properly under this division of our science 
which treats of distribution. 

Taxation is the means employed to gather from 
a people the revenues of its government. To devise 
and apply an equitable sj'stem of taxation, is one of 
jthe most difficult problems of legislation, — a prob- 
■ lem which should be studied in the light of political 
economy, with reference to its one object ; viz., the 
raising of a revenue for the state. 

In despotic governments, the will of the ruler 
determines arbitrarily both the measure and the 
methods of taxation, and gi-eat inequaUty and op- 
pression prevail. It is a fundamental principle of 



REVENUES OF THE GOVERNMENT. 119 

free and just government, that taxes shall be im- 
posed by representatives of tlie people through rea- 
sonable and proportional assessments on all estates, 
and that they shall be collected by agents acting 
under defined powers and direct accountability. 

J 

' Adam Smith's Maxims. The father of modern 

political econom}^ laid down four rules of equitable 

taxation as follows : — 

1. " The subjects of every state ought to contribute 
toward the support of the government as nearly as 
possible in proportion to their respective abilities ; 
that is, in proportion to the revenue which they re- 
spectively enjoy under the protection of the state. 

2. " The tax w^hich each individual is bound to pay 
ought to be certain, and not arbitrary. The time of 
payment, the manner of payment, the quantity to be 
paid, ought all to be clear and plain to the contribu- 
tor, and to every other person. 

3 . " Every tax ought to be levied at the time and in 
the manner in w^hich it is most likely to be convenient 
for the contributor to pay it. 

4. " Every tax ought to be so contrived as both to 
take out and to keep out of the pockets of the peep?© 
as little as possible over and above what it brings into 
the public treasury of the state." 

These maxims embod}' leading principles of equit}', 
by which all schemes of taxation may be tested. 

Direct and Indirect Taxation. According to 
Mr. Mill's definitions, "A direct ta:jf is one which 
is demanded from the very persons who it is in- 



120 POLITICAL ECONOMY. 

tended or desired should pay it. Indirect taxes are 
those which are demanded from one person, in the 
expectation and intention that he shall indemnify 
himself at the expense of another.'* A poll-tax, a 
tax on land, live-stock, tools, furniture, &c., and an 
Income tax, are examples of direct taxes. Duties 
on imported goods, and excises on home manufac- 
tures, are examples of indirecu taxation ; the im- 
porter or manufacturer who pa3's the tax, adding 
the amount of the tax to the price of the goods, to 
be ultimately paid by the consumers. 

Direct taxation fairly applied conforms most fully 
to the principles embodied in the maxims just 
stated. But it involves labor and expense in col- 
]ection, prompts concealment and evasion, especially 
with respect to personal property, and provokes dis- 
satisfaction, because men, when they pay the tax, 
know and feel the full force of the burden. 

Indirect taxation violates nearly all of Mr. Smith's 
maxims, and imposes the burden unequally, each 
one pa3ing not according to his abihty, but accord- 
ing to his necessities, so that a poor man with a large 
family often contributes in this way for the support 
of the government much more than his neighbor 
with ten times his wealth. But indirect taxes, being 
laid in gross on goods at the port of entrj' or at the 
manufactor}^, are easily collected, and are cheerfully 
submitted to, because no one thinks of the tax he 
pa3^s when it is hidden in the price of the goods he 
buys. Direct taxes are certainly most in harmony 
with the genius of a republican government whose 
strength lies in the intelligent support of a freo 



REVENUES OF THE GOVERNMENT. 121 

2)eople. Such a people ought to know what taxes 
they pay, and when and how^ they pay them, that 
they may watch with becoming jealousy over the 
public expenditure, and make their voice heard in 
all legislation on matters of finance. It must be 
confessed, however, that no nation has 3'et attained 
to such a standard of general intelligence, honesty, 
and patriotism, as warrants the dispensing with the 
convenient and easy method of raising revenues by 
indirect taxation. We have need, therefore, to give 
it some further consideration. 

Tariffs. This term signifies strictly the lists of 
imported articles subject to tax, with the duties 
laid on each class. Protective tariffs, designed to 
encourage certain home manufactures, will be con- 
sidered in another place. The tariff is noticed here 
only as a revenue measure, — one form of indirect 
taxation. 

Duties are imposed in two forms, specific and 
ad-valorem. Specific duties are taxes laid on articles 
by the piece, the pound, the yard, the gallon, &c., 
without reference to their value. Ad-valorem duties 
are indicated by a defined percentage of the value 
of each class of goods. Specific duties are simple 
and clear. The collector needs to know only the 
quantity of the goods, and easily reckons the duty 
to be paid. But in this case the tax is unequal. 
Suppose a dut}' of ten cents per pound laid on tea. 
The value of the tea consumed by the poor is thirty 
cents a pound, while that used by the rich is valued 
at a dollar or more : hence the poor man pays a tas 



122 POLITICAL ECONOMY 

of thirty-three and one-third per cent, while the rich 
man pa3^s only ten per cent on the valuation. Ad- 
valorem duties la}^ the tax more equally, but involve 
more difficulty in collection, since the value as well 
as the quantity of the goods must be ascertained. 
This opens the way to fraud b}^ means of false 
invoices : hence the government is compelled to 
employ a host of appraisers, who come into alter- 
cations with importers, and sometimes take bribes, 
and sometimes refuse to recognize an invoice that 
is honest and true. 

For revenue purposes, the best tariff is one that 
lays a specific duty of moderate amount on a com- 
paratively short list of articles whicli are not pro- 
duced at home. In many countries, the heaviest 
duties are laid on commodities, such as intoxicating 
liquors, the consumption of which is regarded as 
injurious. As a check on immorality, the measure 
is of little avail, for experience shows that the con- 
sumption of such articles is not materially dimin- 
ished by the tax ; but, as a source of revenue, it is 
found to yield large results. 

National and State Taxation. The Constitu- 
tion of the United States authorizes Congress to 
impose taxes in everj^ form, subject to the qualifi- 
cations that direct taxes must be apportioned to the 
several States according to their respective popula- 
tions, and that all duties, imposts, and excises must 
be uniform throughout the United States. It ex- 
pressly forbids any State to lay any imposts or 
duties on imports or exports, except for executing 



REVENUES OF THE GOVERNI^IENT. 123 

Us inspection laws. Hitherto, the National govern 
ment has been sustained for the most part by indi. 
rect taxes, in the form of duties on imports, while 
the State governments depend on direct taxes. To 
provide for the expenses of the recent war of the 
Rebellion, however, the general government adopted 
four other forms of taxation, which deserve a brief 
notice : — 

a. Excises. Congi'ess laid taxes on certain arti- 
cles of domestic manufacture, to be collected by the 
sale of stamps, which must be affixed by the manu- 
facturer, or by an officer of the government, to the 
goods, before they were thrown on the market. 
This is an indirect tax, which involves great ex- 
pense in collection, since the government must keep 
agents in every part of the country' to guard against 
evasion of the tax. From a large list of articles 
thus taxed at first, onl^^ liquors and tobacco are now 
taxed in this wa3\ 

h. Stamps. This, too, is an indirect tax, levied 
b}" requiring stamps to be attached to various in- 
struments and forms of business in order to give 
them legal force. By this means the postal ser- 
vice is almost wholl}^ provided for at a ver}^ slight 
charge to the people. It was also appUed to bank- 
checks, deeds, notes, wills, &c. It is an economi- 
cal and equitable mode of distributing the public 
burdens, for it touches directl}' the wealth of the 
countr}' in transition, and at points where it needs 
government protection to insure security. Great 
Britain i 5ses over fifty millions of revenue each 
year fro3 't\e sale of stamps. 



124 POLITICAL ECONOMY. 

c. Licenses. This is a tax imposed by requiring 
men to bu}^, at specified rates, government certifi- 
cates authorizing them to engage in certain kinds 
of business. It is objected to such taxation, that 
it discriminates unequally among industrial occupa- 
tions. In its favor, it is urged that it draws from 
parties such as peddlers, insurance-companies out- 
side the State, and some professional men who 
could not otherwise be reached, a just return for 
the protection of the government which they enjo}'. 

d. Income tax. This is a form of direct tax 
levied by imposing a certain percentage on the 
annual incomes of individual citizens. Theoreti- 
cally, this is the most equitable of all taxes, since it 
touches men exactl}'' according to their abilities. If, 
however, the percentage is uniform for all incomes, 
it must bear heavil}' on those whose incomes are 
small. To relieve this, two measures are adopted 
The first is to exempt all incomes below a certain 
amount ; the other is to establish two or three 
grades, and make the percentage greatest on the 
larger incomes. The chief objections to an income 
tax are the difficulty of ascertaining men's real in- 
comes, and the labor and cost of collecting it. The 
British government has nevertheless, employed this 
method of taxation for forty-five 3'ears so success- 
fully, that nearly one-sixth of the annual revenue 
of the kingdom is derived from this source. Tho 
United States collected an income tax for ten years^ 
from 1863 to 1872. In 1866 the amount thus coL 
lected was about sixty-one millions. Actual expe. 
rience under the law tended to relieve difficultiei 
and objections. 



REVENUES OF THE GOVERNMENT. 125 

Under State authority, all taxes are direct, laid on 
persons b}' poll-taxes, on property by assessment, 
and on certain kinds of business b}^ licenses. The 
poll-tax is ordinarily' a small amount levied on every 
male citizen v*^ho has attained his majorit3\ It 
recognizes the protection which the government 
extends to persons, and is often made in theory a 
condition of the electoral franchise. 

Taxes on property are imposed in all the States 
b}' essential!}" the same method. Assessors are 
elected in every town and cit}-, who estimate the 
value of all property subject to taxation. Real 
estate is commonly set down at from twenty-five 
to thirt}' per cent less than its market value. Per- 
sonal propert}'' is sometimes returned in prepared 
lists by the owners, and sometimes estimated by 
the assessor. In the first case, the owners maj- be 
required to make oath to the completeness and 
truthfulness of their returns ; in the other, if the 
owner thinks the assessor's estimate too high, he 
ma}" " swear it down " to what he believes to be the 
true amount. The original assessments are in most 
of the States referred to boards of equalization ap- 
pointed for each count}^ ; and their judgment is 
subsequentl}' reviewed by a general board for the 
State. Upon the basis of the valuation of property 
so determined, the taxes for State purposes are 
apportioned to each count}", cit}', and town. Each 
county, city, town, and school-district is authorized 
to levy taxes for its local purposes. These also are 
apportioned on the basis of the State valuation, 
except in case of certain city Improvements, such 



126 POLITICAL ECONOMY. 

as opening, paving, and lighting streets, which are 
charged upon the adjoining property. Sound econ- 
omy dictates that all these taxes be collected in 
each town or city-ward at one time by one collector, 
furnished with a tax-list covering all. 

If other means fail to secure the taxes, goods 
may be seized, and lands may be sold, to make up 
the amount required, the title thus given being made 
complete after a certain period allowed the original 
owner for redemption. 

Equitable taxation requires property of every kind 
to be assessed. In actual experience, however, prop- 
erty' in the form of real estate bears the larger 
share of the burden. Personal property can be 
easily concealed or removed b}^ those who wish to 
evade their share of the taxes ; and, with men of 
weak consciences, the temptation is strong to make 
false returns, and even to commit perjury, when 
detection is almost impossible. 

Property in railwa3's, banks, &c., is usually taxed 
as a whole by the State within whose jurisdiction it 
lies. If each individual stockholder is also taxed 
for his share, there is evidently a double taxation 
on that property. 

The same thing happens often when one is re- 
quired to pay a tax on the evidences of debt which 
he may hold, such as notes, bonds, mortgages, &c. 
These things are only s^^mbols, whose multiplication 
makes no increase of real wealth. Suppose A B 
holds his neighbor's note for two thousand dollars, 
secured by mortgage on a farm worth four thousand. 
The property is one, the farm. The note and mort* 



REVENUES OF THE GOVERNMENT. 127 

gage only indicate that A B has a lien on that 
property for one-half its value. The credit given 
and received has added nothing to that value. The 
one propert}^ is justly subject to taxation. Who 
shall pay the tax ? In strictest equity, each of the 
parties should pay a half ; but, in the \evy terms of 
the mortgage, the mortgagor engages to pa}^ all 
taxes that may be levied on the land. This is a 
part of the contract, and the interest is adjusted to 
that usage. If the mortgagor is taxed for the 
whole farm, and the mortgagee is also taxed on th« 
mortgage he holds, there is evidently a double taxa- 
tion on two thousand dollars. 

These cases show the difficulty of adjusting a 
S3'stem of taxation in accordance with strict equity. 
A perfect system seems an unattainable ideal ; but 
it will be approximated just in proportion as senti- 
ments of honesty and patriotism are cultivated among 
a people, and as legislators apprehend and apply in 
their action on this subject the fundamental princi- 
ples of Political Economy. 

EXERCISES. 

1. Wliat source of revenue has our government other 
than taxation ? 

2. What was the effect on the people of Rome, when the 
government was wholly maintained by the plunder of the 
provinces, without taxation at home ? 

3. Is it desirable that a people should be altogether re- 
lieved from contributing to the support of their govern- 
ment? 

4. On what grounds are the public taxes made a first 
lien on all private property ? 

5. Is it right that an aristocratic or priestly class should 
be exempt from taxation ? 



128 POLITICAL ECONOMY. 

6. Can you tell how the Turkish government levies its 
taxes, and what is the effect on the industry of its people ? 

7. What question respecting taxes was a prominent 
issue in the war of the American Kevolution ? 

8. Can you state the mode of collecting taxes in France 
in the eighteenth century, by "farmers-general," and the 
wrongs that attended it ? 

9. How does taxation by duties on imports conflict with 
the first and second maxims of Adam Smith ? 

10. Why is the close of the year generally chosen in onl 
country as the time for collecting taxes ? 

11. Is that an economical kind of tax of which half the 
amount is consumed in the cost of collection ? 

12. Illustrate the difference between specific and ad- 
valorem duties. 

13. Can you state some of the complications and absurdi- 
ties of our American tariff in this year, 1879 ? 

14. If by requiring stamps of small amounts on bank- 
checks, notes, deeds, wills, &c., a revenue of several md- 
lions can be raised, with no expense for collection beyond 
the cost of printing the stamps, is there any good reason 
why the measure should not be adopted ? 

15. What good reasons can be urged by honest and patri- 
otic men against a moderate income tax ? 

16. Is it a good sign for our nation, that the people seem 
averse to direct taxation, the measure and pressure of 
which they can exactly know and feel ? 

17. Is it any less dishonest, by evasion, to cheat the gov- 
ernment out of a legitimate tax, than to cheat a laborer 
out of his wages, or a creditor out of his dues ? 

17. Illustrate the method of assessing and collecting 
State taxes, by the case of a tax-receipt from the collector 
of your own town or city. 

19. What is the meaning of a "tax-title " to land ? 

20. State any instance of double taxation which you 
know of. 

21. On what grounds may school and church property be 
exempt from taxation ? 



EXCHANGE. 129 



PART IV. 

EXCHANGE. 

Wealth is transferred from producers to con- 
sumers by manifold exchanges. The division of 
labor which increases production necessitates ex- 
change. With advancing ci\dlization the processes 
of exchange are systematized into a very compli- 
cated and extensive social machinery, — how com- 
plicated, one may see if he will try to trace the 
cotton in the shirt he wears back to the field on 
which it grew ; how extensive, will appear if one 
will consider how many parts of the world contrib- 
ute to the sum of daily comforts with which his 
table and his home are furnished. Hence, in the 
science of Political Economy, exchange holds the 
place of highest importance ; and some have pro- 
posed to adopt, as a title for the science, the term 
Catallactics, the science of exchanges. 

A full but concise presentation of the first princi- 
ples of this part of our subject will be given in 
several distinct chapters. Only b}' a clear appre- 
hension of these principles can the hard problem!* 
of economics be solved. 



130 POLITICAL ECONOMY. 



CHAPTER I. 

THE NATURE, NECESSITY, AND AGENTS OF 
EXCHANGE. 

As a specific act, exchange is a transaction iq 
•which two parties voluntarily transfer to each other 
the right of property in certain items of w^ealth which 
are regarded as equivalents. Observe that the trans- 
fer must be voluntary, else it involves robberj^ : it 
must convey on each side a right of property, else 
it is fraud. 

It is often said that exchange may be either of 
commodity for commodity, as when one gives a table 
for a pair of boots ; or of commodity for labor, as 
when one gives fifty pounds of flour for a day's 
work at mowing ; or of labor for labor, as when a 
mason gives a day's work in exchange for a carpen- 
ter's work for a day. This is proper enough to 
indicate the precise form of the transaction ; but in 
reahty it is not the labor itself, but the value in 
some form of wealth, the product of the labor, 
which is contemplated. 

Value is thus the central term of this branch of 
our science. Just here let the student turn back to 
the definition and explanations of value as given on 
pages 7 and 8. From the views there given we 



THE NATURE OF EXCHANGE. 131 

derive the following formula, applicable to all ex- 
changes : — 

Value = cost + or— the effect of the ratio of demand 
to supply. 

The general arena of exchange is called the 
market, a tenn which signifies not so much a locality, 
as the actual relation of demand to supply at the 
place and time contemplated for making exchanges. 
By demand is meant the extent of desire for an 
article. Supply expresses the quantity of the article 
at hand to meet that desire. Between these two 
factors competition works continually variations in 
the value of commodities. When demand is great 
in proportion to supply, value is enhanced by com- 
petition among the buj^ers. When supply is great 
in proportion to demand, value is reduced by compe- 
tition among the sellers. So, for the variation of 
value under the law of demand and supply, we have 
another simple formula, as follows : — 

Value rises directly as the demand, inversely as the 
supply. 

The tendency of free competition is to produce an 
equiUbrium between supply and demand (see p. 79), 
and so to make cost the general standard of value. 
Mr. J. S. Mill distributes all things that are bought 
and sold into three classes. 

First, There are things of which it is physically 
fanpoBsible to increase the quantity beyond certain 
narrow limits. Such are ancient sculptures, paint- 
ings of old masters, rare books or coins, and wines 
produced only under peculiar conditions of soil, 
climate, and exposure. 



132 POLITICAL ECONOMY. 

Second, There are things which at a moderate out« 
lay of labor and capital can be multiplied indefinitely. 

With laborers and machinery enough, such things aa 
cotton and woolen goods, shoes, hats, &c., might 
be multiplied a thousand-fold, or at least till the 
limit of the earth's capacity to j'ield materials is 
reached. 

Third, There are things which can be produced in 
limited quantity at a given cost, but to increase the 
quantity involves a much greater proportional cost* 
Such are the agricultural products of a defined area 
of land. A field that yields twenty-five bushels of 
wheat to the acre ma}^ be made to 3'ield forty bushels, 
but the cost will be more than doubled. 

With these distinctions in mind, the following 
fundamental principles of exchange, as presented 
for the most part by Mr. Mill, are plain and almost 
self-evident. 

1. Value is a relative term. All goods sold are 
paid for in goods of another kind. Whoever sells 
a thing becomes in the act a purchaser of some 
other thing, and the value of each is simply what it 
brings in the trade. The values of all things can 
never, therefore, rise or fall at once. A rise of 
value on one side implies a fall on the other side. 

Here the distinction between value and price must 
be observed. Price is value expressed in terms of 
the single article money. If the amount of mone^ 
in a country be suddenly increased, as was the case 
in the United States in the years from 1861 to 1865, 
the prices of all things will rise together, because 
money is cheapened. The prices of wheat and 



THE NATURE OF EXCHANGE. 135 

broadcloth may thus be doubled at the same time 
without changing the value of either : it will take 
the same amount of wheat to bu}^ a yard of broad- 
cloth as before. If it takes twice as much wheat to 
buy a hat this year as it did last, the fact implies a 
change of value on one side or the other. If the 
hat holds the same relation to all other articles as 
before, it is evident that wheat has for some reason 
declined in value. If all other articles must be 
doubled to buj^ the hat, it is e\'ldent that the hat has 
risen in value. 

2. The temporary or market value of a thing 
depends on the demand and supply; rising as the 
demand rises, and falling as the supply rises. As a 
thing grows cheaper, however, under an increased 
supply, the demand increases in greater proportion ; 
because every step downward in the value widens 
the circle of those who are able to buy the article. 

3. Things have also a permanent, or, as it may be 
called, a natural value, to which the market value, 
after every variation, tends to return ; and the oscil- 
lations compensate for one another, so that on the 
average, commodities are exchanged at about their 
natural value. 

4. The natural value of some things is a scarcity 
value ; but most things naturall}^ exchange for one 
another in the ratio of their cost of production, or at 
what may be termed their cost values. 

5. The things which are naturally and permanently 
at a scarcity value are those of which the supply 
cannot be increased at all, or not sufficientl}" to sat- 
isfy the whole demand which would exist for thenj 
at ^eir cost value. 



134 POLITICAL ECONOMY. 

6. A monopoly value means a scarcity value. Mo 

nopoly cannot give a value to any thing, except 
through a limitation of the supply. 

7. Ever}^ commodity of which the supply can be 
indefinitel}^ increased b}^ labor and capital exchanges 
for other things proportionallj^ to the cost necessary 
for producing and bringing to market the most costly 
portion of the supply required. The natural value 
is synonymous with the cost value ; and the cost 
value of a thing means the cost value of the most 
costly portion of it vii^hich the market demands. 

8. If competition be free, the perturbations of 
value caused by variations of demand and supply 
continue only during a period which cannot exceed 
the length of time necessary for increasing or dimin- 
ishing the suppl}^ Under the pressure of competi- 
tion, demand and supply rush towards an equilib- 
rium; but the condition of stable equilibrium is 
when things exchange for each other according to 
their cost, or at what is fitly called their natural 
value. 

The Necessity of Exchange springs from the 
diversity of nature's resources, the diversity of human 
capacities and tastes, and the wide reach of human 
desires, all of which prescribe for human industry 
the principle of division of labor. As men advance 
in intelligence, their desires are multiplied ; at the 
same time, by discovery and invention the resources 
of nature are unfolded in full proportion. Desire 
stimulates invention, and successful invention wakes 
new desires. There is no assignable limit to the 



THE NATURE OF EXCHANGE. 135 

development of either men's desires or nature's 
resources. 

Out of man's social nature spring sympathies, 
attractions, interests, which widen his associations, 
and multipl}" his opportunities, as both a giver and 
leceiver of good things. Hence comes a law of 
interdependence, which forbids that any man should 
live either for or by himself alone. Thus human 
industrj^ is varied ; and each does that for which he 
is best fitted, or which he Ukes best, while mutual" 
exchanges enable each to get what he wants by 
giving what he can spare. 

Where the diverse labor of man}^ is combined to 
produce a single object, exchange is the indispensable 
means of breaking up and distributing the value, SO 
that each ma^^ receive his share, and use it to meet 
his wants. The little screws which a man in a 
watch-factor}^ makes by the thousand will not them- 
selves feed or clothe him. The part which each one 
of a hundred men contributes to the building of a 
steam-engine is of no use apart from the whole, and 
3'et no one can rightl}^ appropriate the whole. But 
the complete watch or engine may be exchanged for 
food and clothing and other things which are desira- 
ble and exactl}^ suited to the needs of all concerned. 

The same principles apply with equal force to 
exchanges between different nations. In man}" cases 
the aptitudes of different nations for the creation of 
pecuhar products is fixed by unchangeable geographi- 
eal and physiological law. Moreover, a nation at 
one period of its history is best adapted to produce 
certain articles. It is obviously best that each 



136 POLITICAL ECONOMY. 

nation should devote its energies to the production 
of those things for which it has the greatest faciUties, 
and by exchange with other nations make the sur- 
phis of its own products provide the products of 
other countries which its people need. Tlu'ough 
the mutual intercourse of nations for trade, civiliza- 
tion is developed, and the happiness of the human 
race is increased. Thus the conditions of our being 
demand the processes of exchange as imperatively as 
the processes of production. 

The Ag-ents of Exchange. Exchange is a 
distinct department of useful industr^^, by which 
conunodities are transferred from the producers to 
the consumers, in such places, at such times, and in 
such quantities, as are most convenient. It involves 
labor, and so adds to the cost of objects ; it adds 
also to their desirableness, b}^ bringing them within 
the reach of those whose wants are to be gratified. 
Thus in both wa3^s it enhances their value to the 
benefit of both parties. By it the producer is helped 
to dispose of his products, and the consumer gets 
things just where and when and as the}' will best 
meet his wants. Obviously this labor will be most 
economicall}' performed by persons who devote 
themselves exclusively to it, receiving a fair com- 
pensation for their service. This compensation is 
made up by a percentage charged on the values 
transferred, of which each party pays a portion ; 
that is, the producer sells his products to the ex- 
changer for something less than he would ask of the 
consumer directly, and the consumer pays the ex* 



THE NATURE OF EXCHANGE. 137 

changer a little more than if he bought directly of 
the producer. But the expense of conducting the 
exchanges is far less than it would be without such 
intervention. 

Merchants is a general name for those who devote 
themselves to the business of exchange ; but the 
term embraces a great variet}' of agents. We can 
attempt onl}" a concise exposition of a few names 
and services. In the commerce of every community 
are to be recognized two great currents of trade, — • 
an outgoing current and an incoming current. Thft 
outgoing current bears awa}" what a people have to 
spare ; the incoming current brings back what a 
people want. In a new countr}'" a retail merchant 
stands at the turning-point where these currents 
meet. He gathers up in small quantities tlie surplus 
products of his neighborhood, and starts them on the 
current of outgoing trade, to float, it may be 5 half 
round the world to find their ultimate consumers ; in 
exchange for these, he dispenses to his neighbors 
small quantities of foreign products which they need. 

As population increases, and j^roducts are multi- 
plied, another agent appears on the ground, caUed 
a middle-man, a produce-buyer, a commission-dealer. 
B3^ arrangement he bu3's up for some house at a 
commercial centre the grain, the cotton, the wool, 
the pork, the butter, or whatever of one kind or of 
mau}^ kinds of produce may be ordered, and is paid 
b}' a percentage on the values purchased. With the 
introduction of railways come in the warehouse-men, 
doing the same thing at every station. From these 
the goods are sent to the consignee or produce-broke* 



138 POLITICAL ECOiq^OMY. 

in the interior city, — Chicago or Buffalo, for in- 
stance. They pass on the goods to the shipping* 
merchant in the great seaport, like New York or 
Baltimore, thence to be exported to the ends of the 
earth. 

In former times, when manufactured articles were 
made by hand, in a small waj', at the homes of 
workmen, they were gathered and thrown on the 
current of trade in much the same manner. But 
since the use of machinery has concentrated manu- 
facturing in large establishments, these products 
are passed out upon the currents of trade through 
the agency of factors or commission-merchants, each 
factory or mill having its own agent of this kind at 
the commercial emporium, who manages the sale of 
its goods in the general market, and is compensated 
sometimes by salary, oftener by a percentage on the 
amount of sales. A domestic factor renders this 
service in the countr}- in which the goods are made ; 
a foreign factor attends to the business in another 
countr3^ 

The incoming current of trade may be best traced 
by taking a stand at a port of entry, — say New 
York. Here the agency of the importer is first to 
be noticed. He studies the wants of his own coun- 
try, and the products and prices of foreign countries 
generally, with respect to a particular class of com- 
modities, and imports what he thinks the people will 
use. These goods he sells generally in bulk, by 
sample, to wholesale merchants in his own and other 
cities. They in turn open them more fully, and sell 
by bale or case to jobbers. Of them the retail 



THE NATURE OF EXCHANGE. 139 

mercliants bu}^ by the piece or small package, to be 
passed to individual consumers in such quantities as 
they desire, and the distribution is complete. 

To this list of agents must be added bankers, 
brokers, &c., — the whole class of those who have 
to do with money and credit, the instruments of 
exchange ; also those who as underwriters and 
insurers distribute the risks, b}' land and b}' sea, 
involved in trade. 

Thus in outline we get a view of the manifold 
processes and agencies of exchange. Their compli- 
cations are intricate ; 3'et b}' a hidden law of self- 
adjustment the machinery works out its legitimate 
result, so that the wants of men are met with little 
waste of the products of industr3\ Rapid exchange 
is the necessary stimulus to production. When 
trade is dull, all industry languishes : when it is 
brisk, labor works on with cheerful hope, assured of 
its reward. The legitimate service of exchangers 
adds something to the utilit}^ of all things that pass 
through their hands. It tends to cheapen every 
thing offered in the market, and to enrich the market 
b}' a thousand-fold multiplication of comforts and 
luxuries for the life of man. How absurd, then, the 
outcry sometimes made against merchants, that they 
produce nothing, and are but drones and leeches of 
society ! 

Nevertheless sound economy requires that the 
number and expense of these agencies be reduced 
as far as practicable, consistently with the end to be 
attained. There is also good reason to protest 
against the abuse of a necessary instrumentality 



140 POLITICAL ECONOMY. 

sometimes witnessed, when a trader or a company 
of traders combine to produce an artificial scarcity, 
that by suddenly raising prices they may rob the 
people, and enrich themselves. Those operations 
which produce corners in wheat, and the like, outrage 
the first principles of justice and honesty. Too 
many of our so-called "boards of trade" tolerate 
and encourage such abuses of trust and power. 

EXERCISES. 

1. Trace tlie exchanges through which the material of 
your knife has passed, from the iron-ore in the mine, to your 
hand. 

2. If you pay a hundred dollars for a stolen horse, why 
is it not a valid exchange ? 

3. What two elements define the extreme limits of value? 

4. Why does a merchant need to study daily the news- 
paper-list of current prices ? 

5. How does the failure of the crop in England increase 
the value of American wheat ? 

6. When we have a large American crop and no foreign 
demand, how is the value of wheat affected ? 

7. What gives the extraordinary value to a genuine 
painting done by Raphael ? 

8. If it required eight bushels of wheat to pay for a ton 
of coal last year, and only six bushels this year, how can 
you tell which article has changed in value ? 

9. AVben will a change of price indicate a change of 
value ? 

10. The introduction of the power-loom increased the 
supply of cotton-cloth a hundred-fold. What effect had 
this on the value of the article? What effect on the 
demand ? 

11. What is the effect of a patent-right on the value of a 
patented article ? 

12. What does the maxim, ''Competition is the life oi 
trade," mean ? Is it true ? 



THE NATURE OF EXCHAKGE. 141 

13. What useful functions do merchants perform ? 

14. By which of the three occupations, agriculture, 
manufacture, or commerce, do men grow rich 'fastest ? 
Which involves the greatest risks ? 

15. When the commerce of a nation is prosperous, which 
will have the greater value, its exports or its imports ? 

16. Why is it right that the retail merchant should charge 
a higher percentage on the price of the goods he sells than 
the wholesale merchant ? 



142 POLITICAL ECONOMY, 



CHAPTER II. 

MONEY AN INSTRUMENT OF EXCHANGE. 

We have seen that the processes of production 
are much faciUtated and improved by the use of 
proper instruments or tools. Proper instruments 
are no less necessary for the processes of exchange. 
Barter, that f.s, the direct exchange of one commodity 
for another, involves many inconveniences and seri- 
ous difficulti(3S. 

For instance, a man has made a table which he 
wants to exchange for bread, shoes, and a hat. His 
product is one thing, and indivisible : the things he 
wants are mimy and diverse. How can he effect the 
desired exchange ? It will take a builder, with six 
hired carpenters, three months to build a house : 
how shall he provide his workmen with daily food, 
&c. , unless by some device he can draw on the value 
of the house before it is finished? When a man 
does nothing but make rivets for knife-handles, how 
is he to subsist b}^ exchange in kind ? 

A 3^et greater embarrassment in exchange by bar- 
ter comes from the difficulty of adjusting the equa- 
tion of value between different articles. How is it to 
be determined whether a shovel is a fair equivalent 
for a pair of boots, or a bushel of wheat for a book? 
By what rule shall it be settled that a farm-laborer 



MOiq^Y A^ INSTRUMENT OF EXCHANGE. 143 

is fairly compensated for a month's work by a suit 
of clothes? 

Under the pressure of these difficulties, men have 
been driven to invent means of relief. Savao;es 
have adopted certain prett}" shells, which they called 
wampum, as counters for exchanges. B}^ a common 
instinct, civilized peoples of different ages and coun- 
tries have used silver and gold as a medium of 
ex'^hange. 

In the complicated operations of modern com- 
merce, money and credit are the two great instru- 
ments of exchange. In the order of both time and 
importance, mone}^ comes first ; and without it the 
other has no meaning. Yet credit, though only a 
symbol of money, is the grand instrument which ac- 
complishes the greater part of the world's exchanges ; 
when properl}' regulated, rendering a service whose 
value cannot be measured, but, when abused, caus- 
ing unspeakable convulsion and disaster. 

The nature and functions of these two instruments 
will be presented in this and the next chapters. 

3Ioney is some useful product of labor, universally 
desired, to which all other commodities are referred 
as a measure of their relative values ; vi^hich is em- 
ployed also as an intermediary instrument for the 
actual exchanges of different kinds of vi^ealth for each 
other. 

It is of the highest importance that all which is 
embraced in this long definition be clearly appre- 
hended. To unfold and illustrate the chief points, 
we present them in two sections. 



144 POLITICAL ECONOMY. 



SECTION L— THE FUNCTIONS OF MONEY. 

Our definition indicates two functions of money. 

First, Money establishes a universal standard of 
ralue. 

Second, Money is a medium for the exchange of 
values. 

As a standard of value, monc}^ performs an office 
like that of a pound-weight, or a yard-stick, or a 
gallon-measure. These instruments are adjusted to 
measure each a certain qualit}^, viz., weight, or 
length, or bulk. Just so the money-doUar is adjusted 
to measure the quality called value. Ob^^ously, 
whatever is used to measure a quality in another 
thing must itself possess that qualit}^ Hence, only 
a thing of value can measure value. 

But, according to the definition of value heretofore 
given, two elements combine in the value of any 
object; viz., utility, or desirableness, and cost, the 
exponent of labor. Whatever substance, then, is 
used as monej^, must be desired as a means of grati- 
fication ; and, the nearer it comes to being always 
and everywhere desired, the better is it fitted for its 
purpose. It must be also a substance which can be 
obtained only by labor ; and, the more uniform the 
amount of labor necessarj^ to obtain it, the better 
will it serve its purpose as money. It is indis- 
pensable that these two elements be combined. 
Hence our definition says mone}^ is " some useful 
product of labor," for nothing else can have value. 



THE FUNCTIONS OF MONEY. 145 

Furthermore, it is important that any standard of 
measurement be fixed with exactness, and kept as 
invariable as possible. An India-rubber 3'ard-stick 
would be a ver}^ uncertain standard of length. The 
French metric system has for its base the ten- 
millionth of the quadrant of a terrestrial meridian, 
called a metre. It cost seven years of great labor 
to determine it with exactness ; but, once ascer- 
tained, it stands forever unchangeable, and furnishes 
a standard unit of measurement for all the mate- 
rial qualities, length, surface, volume, and weight. 
Nature furnishes no such absolutel}' fixed and in- 
variable unit of value ; but certainty, for their stand- 
ard of value, men need to select the thing in nature 
which is most stable and unalterable in the elements 
of utilit}' and cost. 

Such a substance, once adopted and generally 
accepted, determines b}^ comparison with itself a 
price for every thing ; and then, in the transactions 
of trade, all things are exchanged directly or indi- 
rectly by these prices. But let it be ever remem- 
bered, that the price of a thing is simply its value 
measured by money; and, just in proportion as the 
value of money is variable, all operations of ex- 
change must be attended with uncertainty and 
confusion. 

In its second function, as a medium of exchange, 

mone}' performs an oflSce like that of a basket, or a 
wheelbarrow, or a cart, — it is simpty an instrument 
of transfer. The real object of all trade is to effect 
an exchange of commodity for commodity. Tho 



146 rOLITICAL ECONOMY. 

difficulty of doing this directly by barter has been 
already noticed. Mone}'^ comes in to relieve that 
difficult}', l^y means of it, two simple exchanges 
readilj' accomplish what could not be effected by 
one. Thus the man can sell his table for monc}' ; 
that is, he puts the value of the table into monc}', 
just as the farmer puts his eggs into a basket. 
The money is easily divided ; and the baker, the 
shoemaker, and the hatter are read}", each for a 
portion of the money, to give him the bread, the 
shoes, and the hat he needs. In all the manifold 
and complicated operations of trade, mone^^, as it 
passes from hand to hand, is fulfilling this simple 
office of a vehicle of transfer, or, as it is better 
termed, a medium of exchange. One silver dollar 
may thus effect twenty different exchanges in a day, 
just as a wheelbarrow may be used to transport 
twenty different loads. 

Such a common medium of exchange must have 
three essential qualities. 

First, Precision and stability of value : the same 
quahties which we saw to be essential for the first- 
named function of money. 

Second, Universal acceptableness, so that it will 
be readil}^ received by everj^body for things offered 
in sale. 

Third, Divisibility into parts, representing, with- 
out loss of value, different degrees of value, so as 
to furnish an exact equivalent of anj'' required 
amount. 

We can conceive that one substance might be 
adopted as a standard of value, and another cm- 



THE FUNCTIONS OF MONET. 147 

plo^'ed as a medium of exchange; but this would 
involve many practical inconveniencei;. For the 
wide and varied operations of exchange, it is quite 
necessar}^ that the same substance should fulfil these 
two functions, combining in itself the qualities es- 
sential for both. 

This does not impl}', however, that mone}' must 
be actuall}' used as a medium in every exchange. 
With a standard of value once fixed, commodities 
can be measured b}- it, and have their price fixed, 
and then be direct!}^ exchanged for each other. 
Thus the farmer's wife brings her basket of eggs 
and her firkin of butter to the \dllage g,Tocer. The 
price for these articles is fixed in termjj of mone^- ; 
the prices of the grocer's tea and sugar and spice 
are fixed in the same wa3\ Then, b}^ a simple com- 
parison of prices, the one class of articles is set 
over against the other, and the trade is consummated 
without an}' paj-ment of monc}' on either side. Just 
this thing is going on all the time in the commerce 
between New York and Chicago. By processes 
hereafter to be explained, car-loads of goods are 
balanced off" against car-loads of wheat, to the 
amount of millions of dollars, without an}- actual 
payment of mone}'. Thus most of the world's trade 
is reall}' exchange in kind. At e^-er}^ step the 
reckoning is kept in terms of money, and in the last 
settlement the balance must be paid in money. 

In the multifarious transfers of trade, money 
comes into close identification with all wealth ; for 
every thing that has value comes at some time to have 
its price, that is, to be estimated in terms of money* 



148 POLITICAL ECONOMY. 

Hence the great mistake, to which thousant^s of men 
still cling, of regarding money as the most desirable 
of all things to be brought into a country. This mis- 
take can be best corrected by a clear apprehension 
of the fact that money is but an instrument of ex- 
change, itself forming but a very small part of the 
world's wealth, and capable of increasing wealth onl}^ 
as it carries every other kind of wealth where it is 
most needed to satisfy human wants. 

Any article which has value may perform the 
functions of money. Thus, by different nations, and 
in different ages of the world, various articles have 
been emploj^ed. Peoples who live b}^ hunting use 
skins as money. In the territory of the Hudson 
Bay Company the beaver-skin is the unit of value, 
and their money-table runs thus : ' ' Three martens 
are equal to one beaver, one white fox to two 
beavers, one black fox or bear to four beavers, a 
rifle to fifteen beavers." Pastoral nations use cattle 
as an instrument of exchange. Homer tells us that 
the armor of Diomede cost nine oxen. The Greeks 
and Eomans stamped their earUest coin with the 
figure of an ox or a sheep. Hence the Latin word 
for money, pecunia, from pecus, cattle. In ancien 
Syracuse and Britain, money was made of tin ; in 
Sparta, of ii'on ; in Carthage, of a preparation of 
leather ; in Burmah, of lead ; in Eussia, of platinum. 
In Scotland, formerty, nails were used ; among the 
Chinese, pieces of silk ; in Tartary, cubes of pressec? 
tea ; in Ab^^ssinia, salt. Slaves passed as mone^ 
among the old Anglo-Saxons, tobacco in Virginia, 



THE FUNCTIONS OF MONEY. 149 

codfish in Newfoundland, bullets and wampum in 
the earl}' histoiy of Massachusetts, logwood in Cam- 
peachy, sugar in the West Indies, soap in Mexico. 
But from the time of Abraham, who paid to the 
children of Heth ' ' three hundred shekels of silver, 
curi'ent money with the merchant," until now, silver 
and gold have been the chief mone}^ of the civilized 
world. It should be noted, however, that, when any 
thing used as monej' is devoted to another use, its 
functions as monej' cease. Gold or silver coin turned 
into plate, just as really as tobacco or sugar passed 
to a consumer, is no longer money. 

We have seen that whatever is used for money 
must be a thing universally desired. If a nation 
were isolated from all others, so that its exchanges 
were wholly internal, it would be enough that its 
money be acceptable to its own people alone. But 
with the advance of civilization, more and more 
does the stream of each nation's trade flow outward 
to meet and cross and blend with the streams from 
every other nation, in the great ocean of a world- 
wide commerce. Hence the necessity that the sub- 
stance adopted for the standard of value and the 
medium of exchange be the same and uniform in all 
countries, the world over. 

The most profitable exchange for any country is 
to export what is most abundant and therefore least 
valuable at home, and to import what is most wanted 
and therefore most valuable at home. Money may 
accumulate in one country so as to be lower in value 
than other commodities. Then it is of advantage 



150 POLITICAL ECONOMY. 

to send away the money, and in exchange to bring 
in needed commodities. This can easily be done, if 
the money of each country is the same with that of 
every other. 

Such a uniformity of money throughout the civil- 
ized world would tend to prevent that fluctuation in 
the value of money which disturbs and deranges al> 
operations of exchange. With freedom for monej' 
to flow out or to flow in to one and another countrj^, 
as a temporar}^ surplus or deficiency ma}- demand, 
universal commerce becomes a great reservoir, to 
maintain its value at a common equilibrium ever}-^ 
where, just as the ocean maintains the sea-levd 
uniform for the world. 

It is obvious that the adoption by any community 
or state of a kind of money that is not acceptable 
in other countries must exclude that people in great 
measure from the commerce of the world. Hence 
the mischief of an irredeemable paper monej^, or of 
a standard of specie at variance with that of other 
commercial nations. For a country which adopts 
these expedients, the result is inevitably to impede 
trade, and to impair industry. 

EXERCISES. 

1. Show how division of labor creates a special necessity 
for money to aid exchanges. 

2. Illustrate the special difficulty which a painter would 
find, under strict barter-exchange, in disposing of a fine 
picture that cost him two months' labor. 

3. Can you conceive of the conditions of trade, if there 
were no means of fixing prices for commodities ? 

4. If there were no money, what inducement would 



THE FUNCTIONS OF MONEY. 151 

there be for one to produce more than he needed for him- 
self, or how could one accumulate wealth by saving ? 

5. It has been said, " There is no machine which saves 
as much labor as money does." Is the statement true? 
Show how money is a means of saving labor. 

6. Why might not the pebbles of a gravel-hill be used as 
money ? How are slips of pictured paper any better for the 
purpose ? 

7. Wliat qualities for use as money have precious stones, 
such as rubies, sapphires, and diamonds ? What important 
quality do they lack ? 

8. A farmer sold fifty bushels of wheat for §50. He then 
bought a suit of clothes for $20, paid $10 for a gown for his 
wife, and $10 for shoes for his children, and bought $10 
worth of sugar, rice, tea, and coffee. Illustrate the two 
functions of money in the transactions. 

9. What would be the effect on trade, if gold and silver 
coin were liable, as formerly, to be debased at the arbitrary 
will of a sovereign ? 

10. The values exchanged during a single day In New 
York have been reported as high as $400,000,000. In what 
respect was money concerned with them all, and in what 
respect with but a small part of the exchanges? 

11. Can you account for the fact that during this year 
(1879) the foreign trade of the United States brought home 
large amounts of gold and silver money ? 

12. How will the importer in New York decide whether 
to send out wheat, or money, in payment for his goods 
bought in Liverpool ? 

13. Is it good policy for a government to forbid the expor- 
tation of specie, when that will buy the goods wanted from 
abroad to better advantage than any thing else ? 

14. For what utilities besides their service as money are 
gold and silver desirable ? Would they be used as money, 
if they could be used for nothing else ? Are they still 
money, when wrought into gold-leaf or silver spoons? 

15. The Spartan government tried to guard the people 
from avarice and luxury by making iron money for the 
country; can you tell with what result ? 



152 POLITICAL ECONOMY. 

16. If other leading commercial nations make gold the 
me standard of value, what will be the consequence if 
our government insist on making silver the standard for 
this country ? 



SPECIE. 153 



SECTION" IL— SPECIE. 

The precious metals, gold and silver, possess 
certain qualities, peculiarl}- combined, which give 
them special fitness to fulfil the functions of mone3\ 
Hence, when prepared and marked for that pur- 
pose, they are called specie. These qualities may 
be particular^ noticed as follows : — 

1. Gold and silver have an intrinsic utility. Their 
brillianc}", their malleability^ their resistance of cor- 
rosion, and their permanence, make them desirable 
for personal ornaments, for plate, and for the mani- 
fold decoration of temples, houses, and equipages. 
Tor this reason the^^ have alwa^'s had a charm for 
all sorts of people. Their use as money only en- 
hances, and makes more constant and stead}', their 
general desirableness. 

2. These metals are obtainable only by labor; and 
Ihe amount of labor necessary to obtain them is more 
Invariable than that which pertains to other sub- 
•tances. Now and then one has stumbled upon a 
nugget of pure gold of great value ; but ordinarily, 
gold and silver are obtained b}' labor in long and 
patient search, in washing sands, breaking rocks, 
reducing ores, and separating the pure metals from 
other substances. The amount produced is depend- 
ent on the labor employed. 

In respect to the two elements of value, desirable- 
ness, and cost measured by labor, gold and silver are 
permanent and uniform beyond any other products. 



154 POLITICAL ECONOMY. 

Hence their value is more stable than that of any 
thing else. 

3 . These metals concentrate a large amount of value 
in a small bulk. Tiiey are conveniently portable. 
One mvij easily carry in his pocket the value of a 
wagon-load of wheat or a car-load of cattle when 
put into the form of gold. 

4. These substances are capable of minute division 
Without loss. A gold eagle or a silver dollar may 
be divided into ten equal parts, and each part will 
have the value of just one-tenth of the original coin. 
Not so with diamonds, which also concentrate value. 
A large diamond is worth many times its weight in 
small diamonds ; and, once broken into pieces, its 
original value can never be restored. 

5. These metals are of uniform quality. Pure 
gold or silver is the same alwaj's and everywhere ; 
leadity alloj^ed to make the coin harder, but easily 
restored to its original purit}^ without loss. 

6. The value of a definite portion of these sub- 
stances can be easily verified. They are malleable, 
easily' wrought into any shape, and capable of re- 
ceiving and retaining a distinct impression. Their 
lustre, uniform weight, and resistance to the action 
of acids, make it easy to detect adulteration. 

7. These metals are nearly indestructible by acci- 
dent or use. No ordinary fire consumes them ; they 
are not decomposed by atmospheric influences ; they 
Wear awa}" ver}^ slowly. 

8. These two metals are adapted to each other for 
the dififerent exchanges, large and small, w^hich the 
trade of the civilized w^orld requires. Gold tOO mi* 



SPECIE. 155 

nutety divided would be counted with difficult}-, and 
easily lost. For large exchanges silver would be 
inconvenient, on account of its great bulk. They 
are thus well adapted in use to supplement each 
other. 

These metals are employed as the money of the 
world, not because ordained to this by authority of 
human governments, but because in the ordinance 
j)f nature they possess in peculiar degree those 
quaUties so essential to represent precise amounts 
of value, and are ever exchangeable for the same 
amounts of value. In the strictest sense, these 
metals coined constitute the only real money uni- 
versall}' recognized. 

There is nevertheless a legitimate agency of 
government with respect to money. Men use 

mone}' in exchanges for the same reason that they 
use hammers in driving nails, — because they thus 
save time and labor, and the work is thereby better 
done. Yet the convenience of monej' may be in- 
creased b}' the action of the government in two 
waj's. 

First, By indicating a uniform instrument of ex- 
change; that is, by establishing the precious metals 
as a legal tender. If I owe a man for a hat, and he 
will not take the silver I offer in pa3-ment, but de- 
mands beaver-skins, I may not be able to procure 
them : if, on the other hand, I offer him leather, and 
refuse to give him any thing else, he ma}- be de- 
frauded. To prevent disputes, the government 
needs to enact a law, specifying what shall be a 



156 POLITICAL ECONOMY. 

full and valid discharge of such an obligation when 
nothing definite has been agreed upon. Such a law 
need not interfere with special contracts for the 
exchange of particular objects. 

Second, The government can, better than any 
ether pai-t}^, prepare the metals used as mone}^ for 
the purpose by coining. It is evident that the coin- 
ing of money cannot be safely intrusted to individ- 
uals. It would present temptations to dishonest}^, 
too great for ordinary human virtue. Hence, in all 
civilized countries, the coining of money is regarded 
as the sovereign act of the government through care- 
fully selected agents. In our countrj^, this, with all 
other rights of fall sovereign!}", is vested in the 
National Government alone. Congress has the ex- 
clusive power to coin mone3\ 

In the coinage three things must be regarded : — 

First, The quality of the coin. The metal of the 
coinage must be of uniform purit3\ It is of advan- 
tage to mingle with the i)ure metal some portion of 
allo}^, to make the coin harder, and the better to set 
the standard of purity at an exact point. But the 
precise measure of this adulteration should be fixed 
b}" law, invariable and clearl}" made known. 

Second, The size of the coins should be adjusted 
to the convenience of exchange. If too large, the}' 
cannot well be carried about, nor fitted to different 
values ; if too small, they are liable to be lost, and 
increase the trouble of counting. Also, different 
pieces should be adjusted to each other so as to be 
conveniently enumerated. For this, the decimal 
system, as adopted in the United States and in 
France, is probably preferable to any other. 



SPECIE. 157 

Third, The form of the coins should be such that 
each piece shall indicate definitely its value at sight. 
For convenience in counting and piling, flat coins 
are best. To diminish friction, some thickness is 
equisite. The surface should bear a well-marked 
mpression ; common so far as to indicate the na- 
tionality of the coinage, differing so far as to dis- 
tinguish different pieces, and in full relief so as to 
make apparent any filing or wearing-away of the 
metal. The same end is subserved by milKng the 
edges, and raising the rim. It is advisable, also, 
that the amount of pure metal be stamped on the 
face of each coin. 

Since the manufacture of coins requires labor with 
expensive machinerj^, and since the act of coinage 
does impart a slight addition of value to the metal, 
it is right that the OTvner should pay for the service 
rendered. The charge made for coining bulhon 
brought to the mint is called seigniorage. At the 
United- States mint the seigniorage for gold coins is 
only one-fifth of one per cent. 

In continual use, coin becomes worn, its impres- 
sion is effaced, and its value is diminished. Being 
thus unfitted for circulation, it is but fair that the 
government should repair the loss, and not leave it 
to fall wholly on the last holder. Accordingly our 
government provides that gold coins of the United 
States may be received at the treasur}^ at their 
denominational value, provided that, after a circula- 
tion of twenty 3^ears, they are not reduced in weight 
more than one-half of one per centum. 

The government has also authority to control tho 



158 POLITICAL ECONOMY. 

circulation within its own territory of foreign coins. 
Otherwise, worn and depreciated coin of other coun- 
tries maj^ come in, and drive out its own superior 
money. Thus some years ago, our government 
ordered that worn Spanisli and Mexican silver coins 
should be received onl}' at a discount of twent}^ per 
cent on their face-value, though they were really 
depreciated only ten per cent. This made the old 
coins worth more as bullion than as coin ; and they 
were collected and melted. 

The heterogeneous monetary S3'stems of different 
countries involve troublesome fractional operations 
in reducing the coinage of one countr}' to that of 
another. It is therefore very desirable that the 
attempts to secure a Sjstem of correlated interna- 
tional coinage for the civilized nations of the world 
should succeed. A slight change in the vS3'stems of 
the leading commercial nations will secure uniformit}'. 
If with this change a uniform sj^stem of weights and 
measures could also be adopted, the exchanges of 
the world would be greatly facilitated. 

Governments have often transcended their legiti- 
mate powers in legislation about money. Thus 
laws forbidding the exportation and importation of 
money, laws arbitrarily changing tlie value of the 
coinage, and law^s making any thing but gold and 
silver a legal tender, involve injustice, mischief, and 
often abs.irdity. 

The Question of a Double Standard. The use 

of both gold and silver as money is highly advan- 
tageous, almost indispensable ; but the question la 



SPECIE. 159 

raised and much agitated, Should the standard of 
ralue be defined in terms of each metal, and both be 
made legal tender to an unlimited extent? If the 

relative value of the two metals were constant, so 
that they would alwaj^s rise or fall together, there 
would be no objection to the double standard. But 
in the nature of things this is impossible ; for each 
metal has its independent sources of supply, and 
value, as we have seen, varies with the fluctuations 
of suppl3'. When two kinds of mone}' of different 
valuation are thrown into the trade of a country 
together, it is a law, as fixed as the law of gravita- 
tion, that the cheaper money, of inferior value, will 
drive out the dearer money, w^hose value is greater. 
If the government comes in often to adjust the 
relations of the two metals, this interference dis- 
turbs the operations of trade. This diflScult}^ would 
be relieved in measure, if all commercial nations 
were to adopt the double standard ; but even then 
some international congress would need from time 
to time to define the relative value of the two 
metals. 

For its function as a standard of value, it is of 
the highest importance that the value of mone}^ be 
as invariable as possible. Thus far in the history 
of the world, gold has been the more stable of the 
two metals. It would seem, therefore, most advan- 
tageous that gold shovild be adopted as the main 
standard, vrith a wide range for the employment of 
silver as subsidiary coin. In that case, the advan- 
tages of the two metals would be secured ; each 
would become the complement of the other, fulfil- 



160 POLITICAL ECONOMY. 

ling its function as money in a sphere to which thfl 
other is not adapted. 

The views given of the nature and functions of 
mone}^ warrant the following propositions as infer- 
ences or corollaries : — 

1. In every exchange, the cost of the money em- 
ployed is to be regarded as equal to the cost of the 
article for which it is exchanged. If ten dollars is 
the price of a barrel of flour in Lima, it is because 
the cost of producing so much silver there is equal 
to the cost of producing the flour and its transporta- 
tion. This is the natural law of exchange, varied 
only b}' incidental circumstances and artificial ap- 
pliances, which temporarily afiect the supply of 
money or of goods. 

2. The universal freedom of commerce, and the 
use among all nations of the same kind of money as 
the instrument of exchange, must tend to equalize 
any variations in the cost or in the supply of money. 
The commerce of the world is the great reservoir, 
the ocean encompassing the globe, into which all 
contributing streams of money flow ; and its level is 
essentially the same everywhere. By a law as sim- 
ple and constant as that of the tides, the mone}'- 
market will regulate itself, provided trade is free 
and money real and the same every virhere. 

3. The amount of money in any country and in 
all countries is very small in proportion to the virhole 
amount of vrealth and of values exchanged. As a 
standard of value, money regulates all exchanges. 
As a medium of transfer, it is actually employed in 



SPECIE. 16J 

but few. It performs its office best when it movea 
rapidly. It flows from one country to another onl^ 
in the process of equalization just spoken of. 

4. It is of no advantage to increase the amount 
of money in a country, unless it is demanded by an 
increase of production and of active trade. Money 
is onl}^ an instrument like a plough or a power- loom. 
It is of no advantage to a community to have a 
hundred ploughs when onl}' fift}^ can be used, or 
fort}^ looms when twenty will do all the work. In 
a cit}' isolated from the rest of the world, to double 
the amount of money will merel^^ double prices. If 
its trade with other places is free, the superfluous 
money will float awa}^ on the tide of commerce to 
some place where it is needed, just as a surplus of 
wheat or cotton goods must do. 

5. The abundance or scarcity of money in a coun- 
try is not of itself a trustveorthy index of prosperity 
or adversity. We must look back of the fact to its 
cause. A scarcity of mone}', caused by an increase 
of products and great activity of trade, is a sign of 
prosperity. Money abundant because business is 
stagnant, and exchanges are few, indicates adver- 
sity. 

6. The maxim, "It matters not what becomes of 
property, so long as the money is in the country," is 
false and delusive. Labor and capital valued at a 
million dollars were expended on a great manufac- 
tory which proved an utter failure. So much prop- 
erty was lost, none the less so because the monej' 
paid out in setting up the establishment is still cir- 
culating among the people. The money was in that 



162 POLITICAL ECONOMY. 

case but the instrument of throwing away so much 
of vahie. It cannot bring back the vahies lost. If 
a thief should empty 3'our storehouse in the night 
with a wheelbarrow, it would not relieve 3'our loss to 
find the wheelbarrow in the morning, left for some 
honest use. 

The minds of msmy are mystified on this subject 
by the complications of credit with money. A great 
part of the apparent variations in the value of money 
in different countries and at difierent epochs is due 
to the same cause. 

Real money held to its rightful functions is one 
of the most useful inventions ever devised. One 
says, not extravagantly, " Money, in a nation's 
economy, is what the blood is in the life of the 
animal. It is, so to speak, the common reservoir 
in which all food is first dissolved, and by which, at 
a later stage, the elements of nutrition and preserva- 
tion are distributed to the several organs. There is 
indeed no machine which has saved as much labor 
as money.'* 

EXERCISES. 

1. Specify some of the purposes, other than money, for 
which gold and silver are used. 

2. Is the absorption of the precious metals for these 
purposes a benefit, or an injury ? 

3. In estimating the cost of gold, what must be set off 
against the good fortune of some who obtain rich lumps 
with only the labor of picking them up ? 

4. If gold should become as abundant and as easily ob- 
tained as iron, how would its fitness for money be affected ? 

5. Platinum is a rare and useful metal : why is not it as 
well fitted for money as gold ? 



SPECIE. 163 

6. What means are adopted to test the genuineness of 
gold and silver coins ? 

7. We have coins made of copper and nickel : what 
qualities of real money do they lack ? 

8. Could a mere enactment of government prevent the 
use of gold and silver for money ? 

9. Could a law of Congress cause circles of leather, 
stamped, to pass as money ? Why not ? 

10. Illustrate the necessity that the government should 
define some legal tender. 

11. When Jesus was asked whether the Jews ought to 
pay tribute to Caesar, what Avas the pertinence of his asking 
in reply, whose image the coin of the country bore ? 

12. Why would not little solid globes of silver, such as 
the Chinese use, answer the purpose of money as well as 
our coins ? 

13. Why do the manufacturers of silver prefer silver coins 
for the material of spoons, &c. ? 

14. Where large amounts of specie are transferred, is the 
transfer made by count, or by weight ? Why ? 

15. When Germany was composed of a great number of 
petty sovereign states, what inconvenience did travellers 
meet with respect to their money ? How is that incon- 
venience now removed ? 

16. If commercial nations should adopt a uniform stand- 
ard and system of coinage, and unifoim weights and meas- 
ures, how would the study of arithmetic in our schools be 
affected ? 

17. Can any act of Congress keep the ratio of value be- 
tween gold and silver permanent ? 

18. If silver dollars are worth more than gold dollars, 
"which will disappear? 

19. How is it determined that you must give a silver dol- 
lar for a good pocket-knife ? 

20. The great fire in Chicago consumed property valued 
at $200,000,000, but scarcely any of the money in the city 
was destroyed : was the loss any less because the money 
remained ? 



164 POLITICAL ECONOMY. 



CHAPTER III. 

CREDIT AN INSTRUMENT OF EXCHANGE. 

In its broadest sense, credit is confidence in the 
truthfulness and integrity of a fellow-man. Some 
exercise of it is essential to the very existence of 
human societ3\ The simplest services cannot be 
interchanged without credit. If 3'ou hire a laborer 
for a daj^'s work, you trust him as one able and 
faithful to do the work, and he trusts 3'Ou for his 
pa}' till the end of the day. Civilization advances 
with the growth of such mutual confidence. 

As a technical term of Political Economy, credit is 
trust in the promise of an equivalent to be rendered 
at a future time, for values immediately transferred. 
In the processes of exchange, credit becomes a 
substitute for money, and so a distinct and indis- 
pensable instrument for effecting all kinds of ex- 
changes. A very small part of the exchanges of 
the world's commerce is effected b}' the direct 
agency of money. Credit is the instrument em- 
ployed for all the rest. Its utility can hardly be 
over-estimated. At the same time it is a dangerous 
instrument, because so liable to abuse. 

In treating the subject, we need to notice sever- 
ally, the forms of credit, the useful functions of 
credit, and the mischievous abuses of credit. 



THE FORMS OF CREDIT. 165 



SECTION I. —THE FORMS OF CREDIT. 

The leading forms in which credit enters into the 
operations of exchange are, — 

1. Book-accounts. A seller extends credit to a 
bu3^er by simply charging the value of his purchase 
to him on his book. The butcher wants the baker's 
bread, and the baker wants the butcher's meat. 
Each makes his morning pm'chase of the other, to 
be charged in account. On the daj^ of settlement 
the two accounts are summed up, and the difference 
on the one side or the other is paid in mone}^, or 
carried forward to new account. So, too, a farmer 
anticipates the returns of his harvest b}' a running 
account at the store. In either case the direction to 
make the charges implies the promise to pay. 

2. Loans. A lender trusts the promissory note 
of the borrower, engaging to pay with interest, at a 
definite date in the future, the money now loaned, 
or the monej'-value of the goods now sold. The 
borrower may give security' for the promise of his 
note b}^ a chattel-mortgage, or a mortgage on real 
estate. 

3. Mercantile paper. In this case the promise 
takes the form of a negotiable note, given b}^ a job- 
ber to a manufacturer or importer, or by a retailer 
to a jobber for goods bought to be sold again. The 
note runs for a short time, — thirty, sixty, or ninety 
days, — to be provided for by the avails of a second 
sale. Such paper is often passed to second handsi 



166 POLITICAL ECONOMY. 

and may itself become a marketable article in the 
communit}', subject to the regular dealings of 
brokers. 

4. Bank-deposits. The depositor gives his banker 
credit for money put into his hands to be paid on 
liis order, and accepts a certificate of deposit, or an 
entry on his bank-book, as the promise, the voucher, 
for the transaction. The orders by which the de- 
posits are drawn out are called checks. These may 
float about, with a limited circulation, as tokens of 
credit at home. Or, on a wider range, taking the 
form of bills of exchange, the credit thus originated 
may reach round the globe, doing good ser\dce iu 
the exchanges of individuals and of nations. 

5. Stocks. A number of persons wishing to com- 
bine their capital for manufacturing, banking, build- 
ing a railwa}', or whatever, form a stock- compan3^ 
Each gives credit to the compau}- for the capital he 
puts in, and accepts a certificate of stock as the 
promise, or voucher. These stock- certificates are 
transferable ; and credit in this form becomes an 
article of merchandise with a current price, more 
or less variable, from causes natural or artificial. 

6. Bonds. These are issued by corporations, 
cities, states, and nations, as evidences of debt. 
Whoever holds these gives credit to the body cor- 
porate or politic, whose promise is embodied in the 
bond. These, l\ke stocks, are made articles of 
merchandise, and are sought by many for the invest- 
ment of monej\ They are also often made the 
sport of wild and reckless speculation, and so credit 
furnishes instnmients for stock-gamblers to play 
with* 



THE USEFUL FUNCTIONS OF CREDIT. 167 

7. Promissory notes, issued b}' banks or govern- 
ments, and designed to pass from hand to hand as 
currency. Such are our United-States " green- 
backs " and national-bank notes. In this category 
are inchided all forms of " paper money." The pub- 
lic, receiving and using these, gives credit to the 
governments or banks, and confidence rises or falls 
with all causes which affect the abiUty or the sta- 
bility of the promissor. In this form credit flies 
everywhere, and attaches itself to every transaction 
of business ; safe and helpful, or hable, like a bub- 
ble, to sudden inflations and collapses, which shake 
and unsettle all trade and all industr}^ 

It is beheved that all forms of credit in use may 
be classed under one or other of these heads. In 
all cases the true basis of credit is real wealth, 
existing or prospective, supposed to be at the com- 
mand of the party trusted. Its essence is confidence 
in the ability, truthfulness, and integrity of the party 
trusted. 



SECTION II. — THE USEFUL FUNCTIONS OF 
CREDIT. 

As we take up this topic, a few words are needed 
in the outset to correct some false notions quite 
common. 

Credit is not capital. It is only a means of 
transferring capital from one person who cannot 
use it, to another who can. If a man has borrowed 
ten thousand dollars to set up a flouring-mill, giving 



168 POLITICAL ECONOMY. 

Ms note for the amount, there is but one capital, 
and it is all in the mill. The note which the lender 
holds is a simple symbol of the one capital, indi- 
cating that it belongs, not to the miller, but to the 
holder of the note. 

Credit does not of itself create capital. It has nO 
magical power to make> something out of nothing. 
Wealth does not grow by the mere act of passing 
from hand to hand. It can be increased onl}^ by 
union with labor. Credit transfers it for such a 
union : it can do no more. 

The same capital cannot be used by both the bor* 
roi;ver and the lender at the same time. A farmer 
who has lent a neighbor his plough, cannot at the 
same time use the plough on his own field. No 
more can B use for his own purposes the thousand 
dollars which he lent to A. He may get a thou- 
sand dollars b}'' selling the note to C at its face 
value, and C may sell it to D, and so on till it gets 
to Z ; but each moA^e only changes the lender of the 
one original sum. In the end the whole series of 
transactions will be settled b}^ one act, when A pays 
Z, and takes up the note. 

But credit, when held to its legitimate functions, 
renders important services to all departments of 
industry. 

1. Credit brings wealth into the form of capital, 
and makes it available for the increase of "wealth, 
"Widows, minors, aged persons, professional men, 
otherwise occupied, and unfamiliar with manufac- 
tures and trade, are often the owners of property 
from which they need an income ; but they cannot, 



THE USEFUL FUNCTIONS OF CREDIT. 169 

bj'' their own labor, make it productive. By means 
of credit this wealth is made productive capital for 
the benefit of all parties. Credit also gathers up the 
small savings of man}', and puts them into union 
with labor for profitable use. 

2. Credit gives efficiency to the industrial talent 
ot a people. By means of it many a poor man, of 
strength and skill, obtains the needed capital by 
which alone his powers can be emplo3'ed and devel- 
oped. A large portion of the most successful busi- 

. ness-men in our country- have begun with only their 
own faculties and energies, and a character to com- 
mand confidence, and bring them capital on credit. 

In the light of these two of its functions, credit 
is indispensable, both to the full drawing out of the 
capital of a countr}', and to the full development of 
its industrial talent. Thus it touches both the 
springs of productive industry, — capital and labor. 

3. Credit quickens exchanges. The crops of the 
farmer stored in his granar}', and the products of 
the manufacturer waiting for purchasers, are capi- 
tal lying idle. By selling to the middle-man or the 
jobber on credit, this wealth is set moving at once 
towards the consumers who need it, and the pro- 
ducers have means for new products. Rapid ex- 
changes turn over capital often, and with every turn 
wealth is multiplied. The most important functions 
of credit fail within the sphere of exchange. 

4. Credit serves directly as an instrument of ex- 
change. This is evident in book-accounts. A buys 
of B, and B buys of A ; the values being entered in 
the account on either side. On settlement there 



170 POLITICAL ECONOMY. 

may be a small balance to be paid in mone5^ But 
for the greater part of the transfers, the credit-entry 
has sufficed. The aggregate of exchanges thus 
effected is very large. 

The same thing is done on a larger scale by credit 
in the form of bank-deposits. Suppose four men do 
business at the same bank. A pays B a hundred 
dollars for a horse, by his check on the bank. B 
may make a payment of the same amount on the 
same day and in the same way to C, and C to D, 
and D again to A. The four checks are passed into 
the bank. On each of four accounts in the bank 
corresponding entries are made. At the close of 
the day the accounts stand as they did at the 
beorinninsf. But those entries have effected four 
exchanges, without drawing out or even counting 
a dollar of money. 

The New- York Clearing House is a central bank 
of deposits for all the banks of the city ; and the 
scale on which credit fulfils the function we are 
speaking of is illustrated by the fact that transac- 
tions of exchange for one da}', amounting to more 
than two hundred million dollars, are settled in the 
space of one hour, requiring the transfer of only a 
few thousand dollars in money to provide for small 
deficiencies here and there. 

Credit fulfils a Uke office in adjusting exchanges 
between distant cities. The sales and purchases of 
every community, as well as of every individual, 
must be substantially equal. The agricultural prod- 
ucts sent from Chicago must pay for the goods 
brought from New York. The chief instrument of 



THE USEFUL FUNCTIONS OF CREDIT. 171 

this exchange is credit, in the form of drafts, passed 
through the banks of the two cities. Thus produce- 
dealer A in Chicago ships five thousand dollars' 
worth of wheat to B, his consignee in New York, 
and makes a draft on B for the amount, which ho 
deposits in his Chicago bank. The bank forwards 
the draft to the bank in New York with which it 
deals, and the same day sells to C, a Chicago mer- 
chant, its draft on the New- York bank for five 
thousand dollars, to pay for goods he has received 
from a New- York importer. The return of the 
drafts all around closes the transactions ; and credit 
has effected the exchange of wheat for drj- goods, 
with only the labor of making a few ledger-entries, 
and writing two or three letters. 

The case is essentially the same between the 
chief trading cities all over the world. The foreign 
trade of Boston is mainl}' an account-current with 
all the cities of the world with which she has com- 
merce. Provisions sent from Boston to the West 
Indies are made to pa}' for tea imported from China, 
by means of credit in the form of bills of exchange, 
passed through Liverpool as an intermediate centre 
of trade. 

5. Credit, to a limited extent, may be safely put 
into the form of currency or paper-money. It is a 
rule of sound econom}-, to use the cheapest tools 
which will serve the desired purpose. If promissory 
notes of banks, to an amount equal to double the 
specie they hold, will effect exchanges well and 
safel}', the real value of half the gold and silver, 
fixed in money, may be devoted to other purposes. 



172 POLITICAL ECONOMY. 

So far the instrument of exchange is cheapened, to 
advantage. This use of credit, however, runs close 
upon the line of danger, and needs careful restric- 
tions. 

For all these functions of credit a basis of sound 
money is indispensable. Nothing but real mone5 
made of gold and silver can furnish the universal 
standard of value required. This is the ballast of 
the ship of trade. Credit furnishes the sails. Any 
ballast that easily shifts in a storm brings danger to 
the ship. The credit which circles the world, and 
binds all civilized nations together by the common 
interests and mutual service of universal commerce, 
must be sustained by the all-pervading presence of 
money, whose value is uniform and stable. 

SECTION IIL — THE ABUSES OF CEEDIT. 

Credit is in its nature illusory, since it springs out 
of men's hopes, and rests on prospective rather than 
real wealth. Hence there is an element of danger 
always in close connection with its legitimate use, 
and it is especially liable to abuse. Some of its 
abuses may be named, as follows : — 

1. Credit is abused when too freely granted. 
Thus the thriftless spendthrift runs up an account, 
never to be paid. In his eagerness to trade, the 
New- York jobber trusts his goods to a swindling 
adventurer, who runs to some little Western city, 
rushes off the goods at less than cost, and disap- 
pears just as his notes fall due. Too often bankers 
have to mourn over their, too easy allowance of ovei^ 
drafts* 



THE ABUSES OF CREDIT. 173 

2. Credit is abused by the wild speculation of 
t)orrowers. One who does business with borrowed 
capital is bound to avoid great risks. But often 
men working with the capital of otliers embark 
recklessly on uncertain ventures, in which they 
would not risk their own property. Thus the capi- 
tal of banks is sometimes involved in gambling 
operations of the stock-exchange. 

3. Credit is abused by the extravagant living of 
debtors. It is said that of those who enter the 
mercantile profession, ninet^'-nine of ever}' hundred 
fail. Nine-tenths of these failures are due to rash 
ventures and extravagant expenses, incurred with- 
out regard to pending debts. 

4. Credit is abused by confidence-operations. The 
term includes schemes of speculation, which have 
only credit for their basis, whether organized under 
a temporary illusion, like the operations in Western 
lands in 1836, or with a fraudulent purpose, like 
many mining-companies. The commercial history 
of the world is full of instances of the strange facil- 
ity with which the imagination and credulity of men 
are imposed upon. 

5. Credit is abused by the betrayal of trusts. 
Cashiers and bookkeepers conceal their thefts by 
false entries ; presidents perjure themselves, swear- 
ing to false statements ; stockholders' notes are 
counted as cash capital ; trusted agents run aw a}' 
with funds of their emplo3'ers. Such acts are pos- 
sible, and all too common, under loose methods of 
credit. 

6. Credit is abused by the over-estimate of assets, 



174 POLITICAL ECONOIVIT. 

sometimes fc r purposes of fraud, sometimes through 
simple self-d Bception ; every man desiring to see the 
bright rather than the dark side of his business- 
prospects. 

7. The most sweeping and mischievous abuse of 
credit appears in the excessive issue of paper-money. 
This touches all the processes of exchange with 
disturbing force, and is the source of panics and 
commercial crises. 

Some of the mischiefs caused by these abuses of 
Credit may be mentioned. 

a. They cduse ruinous fluctuations of prices. Mr. 
Mill says, "In a state of commerce in which much 
credit is habitually given, general prices at any 
moment depend much more on the state of credit 
than on the quantity of money." 

6. Honest men are compelled to pay for the losses 
which proce<>d from bad debts. The profits of the 
merchant must be enough to guard him from loss in 
the risks he runs, and these come from his pa^'ing 
customers. 

C. These abuses of credit tend to turn all trade 
into a game of chance. Here and there a splendid 
prize is won, and it dazzles men's eyes. 

d. Through familiarity with failures and frauds, 
the moral sense is deadened vs^ith respect to a debtor*s 
obligations. How can it be otherwise when a bank- 
rupt's settlement with his creditors at fifty cents on 
the dollar is a common fact? 

e. The abase of credit tends to relax the bands 
of law^ for the enforcement of contracts. As a 
/natter of fact, under this influence, the collection 



THE ABUSES OF CREDIT. 175 

of debts b}^ legal process has become difficult, almost 
impossible. 

These evils call for earnest and persistent efforts 
to raise the tone of public sentiment and common 
practice respecting credit. The honest part of the 
debtor class are most of all interested in securing 
Buch a reform. 

EXERCISES. 

1. What would be the effect on tlie social life of men, if 
mutual distrust prevailed ? Illustrate. 

2. Illustrate by an actual or supposed case each of the 
forms of credit named: viz., book-accounts, loans, mercan- 
tile paper, bank-deposits, stocks, bonds, and circulating 
promissory notes. 

3. A bought fifty dollars' worth of goods of B ; B bought 
nothing of A, but bought fifty dollars' worth of C, and C 
bought fifty dollars' worth of A ; corresponding charges are 
made on the several book-accounts: how can the v/hole be 
settled by credit, without the pajinent of any money ? 

4. Explain a usage common with banks, called "dis- 
counting mercantile paper." 

5. Suppose you buy twenty-five dollars' worth of books 
in New Haven, Conn., and send in pajTnent a draft for the 
amount made by a Kenosha bank on a New-York bank: 
explain the functions of credit in the transaction. 

6. B holds a certificate for a thousand dollars of the 
stock of the First National Bank of Chicago: what does 
that certificate mean ? What is meant by the expression, 
"hypothecating stock" ? 

7. A grocer pays a farmer a five-dollar United-States 
greenback for a firkin of butter: is it a money-payment or 
a credit-payment ? Prove your answer. 

8. Suppose Congress at its next session should order a 
hundred million dollars additional greenbacks to be issued: 
would the act add that amount to the capital of the coun- 
try? 



176 POLITICAL ECONOMY. 

9. Suppose, instead, a hundred million gold dollars 
should be issued from the mint : would the capital of the 
country be increased by so much ? 

10. How does a savings-bank increase capital ? 

11. How does credit help a manufacturer to anticipate the 
sale of his products for the payment of his employes ? 

12. Can you explain the "letters of credit" which many 
use to provide for their expenses in travelling in Europe ? 

13. Is it a wrong to a man to ask for some evidence of 
his character before extending credit to him ? 

14. Is it right for one who is doing business on borrowed 
capital to embark in doubtful speculations ? 

15. What is the real cause of most of the defalcations 
which so often occur? 

16. Is it generally either unjust or unkind to insist on the 
prompt and faithful fulfilment of pecuniary obligations ? 

17. Is it advisable to restore the laws of imprisonment for 
debt which were in force in all our States sixty years ago ? 

18. Why should not defalcation be classed with theft and 
robbery as a grave crime ? 



BAl^KS AND PAPER-MONEY. 177 



CHAPTER IV. 

BANKS AND PAPER-MONEY. 

The word bank is of Italian origin. In the 
infancy of European commerce, the Jews in Italy 
were wont to assemble in the market-places of the 
principal towns, seated on benches, ready to lend 
and exchange money: hence the term "bank," 
from banco, a bench. When an}' of these mone}'- 
lenders failed, his bench was broken, and so we 
have the word bankrupt. 

In the S3'stem of modern commerce, banks are 
the chief agents of credit. Credit, as we have 
seen, holds an important place in the processes of 
exchange. The principle of division of labor re- 
quires that some persons should make it their spe- 
cial business to direct and manage its complicated 
machiner}'. In banking institutions, men devote 
themselves to the systematic administration of credit 
for the manifold service of trade and industry, a 
service which is indispensable and* invaluable. Like 
all other good agencies, this may be abused and 
misdirected. This danger will be best guarded 
against, when the legitimate functions and uses of 
banlts are well understood by all classes of people. 



178 POLITICAL ECONOMY. 



SECTION L — THE OFFICES OF BANKS. 

Banks fulfil four distinct offices : — 

1 . The collection and custody of money-deposits to 

be the basis of credit in trade. If all the exchanges 
of a community were to be effected by monej^ alone, 
every business-man must have in his own keeping 
a considerable amount of mone}'. To guard this 
from robber}" and loss, would involve no little pains 
and expense. In doing any large business, the 
mere counting of the specie paid and received would 
require much labor. It is an important office of a 
bank to relieve these risks and labor, b}' establish- 
ing, in a convenient localit}", a safe central reposi- 
tor}' for the specie of a communit}-, and charging a 
cashier and other officers with the responsibility of 
its safe keeping and transfer. Then, as individ- 
uals deposit what the}^ receive, and draw for what 
they pay, credit is made, in the manner heretofore 
described, to effect a great part of each day's ex- 
changes, while the mone}^ lies secure in the vaults 
prepared for it. It would be good economy to 
make such an arrangement, even if all who enjoyed 
its benefits had to contribute directly to pay the 
banker for his service. But the compensation de- 
rived from their other offices enables the banks to 
do all this gratuitously. 

2. Closely allied to this is the ofiice of banks in 
negotiating money-exchanges. The coin issued by 

one nation does not pass freely in another country 



THE OFFICES OF BANKS. 179 

where it is not known. A German inmaigrant com- 
ing into New York will need to turn the thalers he 
brings from his native land into Amer'can dollars. 
At the bank he can do it safel}^ b}^ paying a small 
fee, for there the relative value of the two coinages 
is well understood ; and the next da}^ perhaps, some 
one going abroad will call on the bank Vov exchange 
the other viay. But a more important, and exten- 
sive business of this kind is needed to provide for 
pa3'ments to be made in distant and foreign places, 
by drafts and bills of exchange. A genuine draft 
on Chicago is acceptable in all the North-western 
States. A draft on New York is good in an}" part 
of our country. A bill of exchange on London will 
command money for its possessor in any city of the 
civilized world. Banks, through the credit they 
have with each other, are prepared to .Airnish their 
customers with orders of this kind as they may 
desire, their pa3^ment being for the most part actu- 
all}' made by the exchange of goods sh.pped to and 
fro. This resolves the commerce of the world into 
barter-exchange. The banks charge a slight pre- 
mium for exchange of this kind, the rate var3'ing 
with the balance of trade between different places. 
The daily newspapers of leading cities give the 
prices-current for exchange as the}' do for goods 
bought and sold. 

The quotations for British exchange are peculiar, 
and need explanation. The premium for exchange 
on London will be seen ordinarily stated at from 
nine to ten and a half per cent. This apparently 
high rate is due to the fact, that, at the time qui 



180 POLITICAL ECONOMY. 

government was formed, the old Spanish milled 
dollar was in use, and $4.44 was fixed as the rate 
at which the pound sterling must be computed at 
our custom-houses. Since then our American coin- 
age has been changed ; and the relative value of 
gold and silver has changed, so that now a pound 
sterling equals $4.86 of American coin, but the old 
mode of computation is continued : hence British 
exchange in New York is at par when it is quoted 
at nine and a half per cent premium, the difference 
between $4.44 and $4.86. This needs to be borne 
in mind in all calculations of the cost of bills on 
London. 

3. To make loans and discounts is another office 
of banks. The union of capital and labor is neces- 
sary to produce wealth. But often one has the 
capital, and another the capacity to labor. A bank, 
as an agent of credit, brings the two elements to- 
gether in the most expeditious and convenient way. 
He who has capital puts it into the bank to be 
loaned for him. He who needs capital can go to 
the bank, and borrow. The banker, devoting him- 
self to this occupation of loaning, becomes expert 
in the negotiations, keeps himself informed as to 
the character and responsibihty of borrowers, and 
understands all the legal forms essential for a valid 
contract. 

The terms loan and discount indicate two dif- 
ferent modes of lending, adopted by different classes 
of banks. Savings banks receive on deposit the 
small savings of great numbers of people, make 
loans for long time secured by real estate or other 



THE OFFICES OF BANKS. 181 

ample securities, and collect the interest semi-annu- 
ally as it accrues. Commercial banks gather funds 
of the wealthy as their capital, and the temporary 
deposits of men in active business, and make their 
loans for short time, Gixty or ninet}' da3's, on per- 
sonal security, taking interest in advance as a dis- 
count or deduction from the principal sum borrowed. 
4. A fourth office performed by many banks is 
to issue promissory notes for general circulation as 
a substitute for specie. This creates one kind of 
paper-money, which will be treated of in a subse- 
quent section. A few words here will suffice to 
indicate the manner in which such notes are thrown 
into circulation. A portion of specie is set apart 
as the basis of the issue. Thus the bank loans not 
the specie which it holds, but its own notes pa3'able 
in specie, receiving in return the notes of individ- 
uals guaranteed by indorsers for the amount loaned, 
to be paid at a future day. Reallj^, the bank loan» 
its own credit. The notes thrown out are mere 
s3Tiibols of value, not representatives of it as specie 
is. If the amount issued is just equal to the amount 
of specie in the vaults, the holders of the notes 
have a double security ; viz., the specie in the bank, 
and the obhgations of those to whom the notes 
were loaned. The security might be considerably 
reduced with safety, by issuing notes somewhat in 
excess of the specie in reser\'e, since they could 
never be all presented at once. But, without well- 
devised checks, this course leads to danger. This 
office is not necessarily associated with the others 
named. 



182 POLITICAL ECONOMY. 

In the fulfilment of these offices, banks, as public 
corporations of known character, offer inducements 
for the introduction of foreign capital. This inci- 
dental benefit is of great importance to the advance 
of a new country. 

Through these offices, banks render important 
services to the finances of sovereigns and states, 
steadying and strengthening the bands of govern- 
ment, and furnishing timely aid in the emergencies 
of war and of great national enterprises. 



SECTION" II. — THE UlSITED-STATES NATIONAL- 
BANK SYSTEM. 

The limits of this work do not give place for a 
historj^ of banking, or any notice of foreign banks. 
The present banli-S3^stem of our own country must, 
however, be briefly presented. 

This system was established b}^ Act of Congress 
in 1863. It is under the charge of a bureau of the 
Treasury Department, the chief officer of which is 
the comptroller of the currency. 

Under this act a national bank may be organized 
by any number of persons not less than five, the 
capital in any instance to be not less than $100,000, 
except that in cities containing a population not 
exceeding six thousand, banks may be established 
with a capital of not less than $50,000 ; in cities 
having a population of fifty thousand or more, the 
capital of each bank must be not less than $200,000. 

Not less than one-third of the capital must be 
invested in United-States bonds, upon the security 



UNITED-STATES NATIONAL-BANK SYSTEM. 183 

of which circulating notes may be issued equal in 
amount to ninety per cent of their current market- 
value, but not to exceed ninety per cent of the par 
value of the bonds deposited. The notes, officially 
certified by the Treasurer of the United States and 
the Register of the Treasur}', are receivable at par 
in the United States in all payments to and from 
the government, except for duties on imports, inter- 
est on the public debt, and in redemption of the 
treasur3^-notes. They are redeemable on demand 
in lawful money of the United States. 

A subsequent act of Congress laid a tax of ten 
per cent on the circulating notes of previousl}^ exist- 
ing State banks, in consequence of which most of 
those banks re-organized under the national S3-stem. 
Thus our present bank-currency consists of notes 
of national banks, which are of uniform value in 
all parts of the country, the pajment of which is 
guaranteed by the government. Provision is made 
for frequent visitation of the banks by government 
officials, to investigate their operations ; stated re- 
ports are called for ; and the comptroller of the cur- 
rency may appoint a receiver to wind up any bank 
which is in an unsound condition. 

The national banks may receive deposits, sell 
bills of exchange, and loan mone}^ at the rates of 
interest allowed b}^ law in the States where the}^ are 
located. For the circulating notes this system pro- 
vides all the securit}^ which the credit of the United 
States can give. But it provides no security for 
deposits and other liabilities, except that all share- 
holders are held individually liable to the extent of 



184 POLITICAL ECONOMY. 

the amount of their stock, in addition to what the^ 
have paid for their stock. The law now fixes n« 
limits to the number of banks that may be organ- 
ized, or to the total amount of notes that may be 
thrown into circulation. The circulation has ranged 
from three hundred to three hundred and fifty mil- 
hon dollars. Of the more than two thousand na- 
tional banks which have been organized, very few 
have failed, and the pubhc has incurred no loss on 
the currency. 

From Feb. 25, 1863, to Nov. 1, 1879, there had 
been organized 2,438 national banks. Of these 
only 81 had been placed in the hands of receivers 
lo be closed, 307 had gone into voluntary liquida- 
tion ; leaving 2,050 in operation at the last-named 
tlate, with capital $455,240,000, deposits $713,400,- 
OOO, and circulating notes outstanding $337,181,- 
418. 

The system will be further illustrated by a state- 
ment of the lialbilities, the resources, and the profits 
of the banks. 

The Liabilities are as follows ; — 

1. The capital stock. 

2. The circulating notes. 

3. Deposits. 

4. Balances due to other banks, especially from 
banks in the great cities to those in the country. 

5. Surplus funds and reserves, held to strengthen 
the banlis against contingencies, which are a virtual 
addition to the capital, and belong to stockholders. 

, 6. Undivided profits and unpaid dividends. 



UNITED STATES NATIONAL-BANK SYSTEM. 185 

7. Miscellaneous liabilities, small obligations not 
classified. 

The Resources embrace the following items : — 

1. Loans, which represent the chief business of 
the banlt. 

2. United-States bonds deposited Tt^ith the comp- 
troller. 

3 . United-States bonds and other stocks and bonds 
held as investments. The reserves take this form. 

4. Balances due from other banks. 

5. Real estate, a place for business and property 
taken for debts. 

G. Exchanges and cash items, — bills of exchange, 
drafts, &c., on hand. 

7. National-bank notes and legal-tender notes, 
held to meet daily calls for currenc}'. 

8. Legal-tender notes and specie, for the redemp- 
tion of circulation. 

9. Miscellaneous resources, small items not classi- 
fied. 

In a regular bank statement the liabilities and 
resources thus presented balance each other, and 
the items on either side show the actual condition 
of the bank. 

The sources of Profits of banks are, — 

1. Interest, from several distinct sources. 

a. Interest on United-States bonds deposited 
with the comptroller. 

1). Interest on circulating notes loaned. 

c. Interest on the remaining capital and reserves 
loaned, or held in productive stocks. 

d. Interest on a portion of the deposits also 
loaned. 



186 POLITICAL ECONOMY. 

2. Premiums on exchange. 

3. Commissions for collections. Claims from 
abroad are often sent to a bank, as an agent of 
established character, for collection. 

With prudent management the profits of banking 
are sure, and compare favorably with those of any 
other business. The undue expansion of loans, in 
order to increase profits, involves the danger of 
throwing the centre of gravity outside the base, 
with a consequent downfall. 

Private banking-houses exist in all parts of the 
country, and fulfill all the offices named except the 
issue of circulating notes. Some of these have 
gained a character and standing which command 
a world-Vvide confidence. Their credit rests upon 
personal integrity, wise management, and large 
resources accumulated through years of devoted 
industry. 

Savings banks, mostly without capital, simply re- 
ceive and loan deposits. The savings banks of our 
country, 673 in number, thus manage funds amount- 
ing to over $750,000,000, drawn from some millions 
of depositors. 

In May, 1879, the entire banking business of our 
country was represented by 6,360 institutions, whose 
aggregate capital was $656,500,000, and which had 
credited on their books deposits amounting to $1,- 
893,500,000. 

The comptroller of the currency, in his report 
dated Nov. 1, 1879, estimates the circulating me- 
dium of our country as follows ; — 



PAPER MONEY. 187 

freasury-notes (greenbacks) outstanding . $346,681,016 

National-bank notes outstanding . . . 337,181,418 

Gold in the treasury 157,960,193 

Silver in the treasury 50,078,620 

Coin in the banks 42,173,741 

Estimate of coin held by the people . . 231,478,515 

Total $1,165,553,503 



SECTION III. — PAPER MONEY. 

Real Money is made of the precious metals, and 
is capable of representing all kinds of values, be- 
cause it has value in itself. But on account of its 
bulk, its weight, and its costliness, some more con- 
venient instrument is desirable for many operations 
of exchange. The ancient commercial nations felt 
this need, and took various measures to meet it. 
The Carthaginians adopted a S3'mbolic mone}^ made 
of anj' object of the size of a coin, enclosed in a 
leather envelope, and stamped with the seal of the 
state. The Doge of Venice, and other sovereigns 
of the middle ages, issued leather money as a prom- 
ise of future pa3'ment. The Chinese, as far back 
as the seventh centurj' A. D., had various kinds 
of paper monc}' which thej' called " fl3ing coins.** 
The necessit}^ is acknowledged to-da}^, and all com- 
mercial nations are using some kind of paper mone3\ 

Roscher notes well a distinction to be made be- 
tween paper money and money paper. The latter 
term embraces di-afts, bills of exchange, certificates 
of stock, bonds of cities, states, &c., and like forms 
on paper, which are definite calls for monej-, titles 
of ownership, evidences of debt. These are bought 



188 POLITICAL ECONOMY. 

and sold, and so, in a sense, circulate ; but, like 
substantial goods, they require money to circulate 
them. Paper money, on the other hand, is intended 
for circulation, in the place of mone3^ It must be 
itself ever afloat, as a means of floating everj^ thing 
else. It is made up of promises to pay money, but 
to no definite person, in no definite place, at no 
definite time ; good for the functions of money in 
purchases and sales, just so far and just so long as 
men believe the promise. 

Several kinds of paper mone}' may be specified. 

1. There is what Mr. Walker terms mercantile 
currency. This signifies promises of banks to pay 
certain amounts of money on demand ; the bank 
holding the full amount of coined money or bullion 
in reserve to fulfil the promise of every bill issued. 
Such were the notes of the Bank of Amsterdam as 
first issued ; such are, and have been for more than 
two hundred and fifty j^ears, the notes of the Bank 
of Hamburg. Such are the gold- certificates of the 
United-States Treasury. These involve only truth- 
fulness and integrity on the part of the bankers or 
oflScers of the government to insure entire credit. 
Such notes combine the convenience of paper with 
the security of specie. Its basis is solid and im- 
movable. It is paper money resting on real money. 

2. There is our national-bank currency, which 
consists of bank-notes secured by a reserve of gov- 
ernment-bonds instead of specie ; the government 
holding the securities, guaranteeing the fulfilment 
of the promises, and requiring the banks to hold 
specie in readiness, sufl3cient to make payments 



PAPER MONEY. 189 

when called for. Here the strength of the security 
is measured by the credit of the nation. It ia 
paper monej' resting on money paper. 

3. Mixed currency. This is composed of written 
promises to pay specie on demand, issued by banlcs 
in excess of the actual amount of specie held for 
their redemption. It is called mixed because its 
basis is partly coined money, and partly credit in 
the notes of their customers discounted b}^ the 
banks. The notes of the Bank of England and of 
the Bank of France are of this character ; and such 
were the notes of the old State banks and of the 
United-States Bank in our country. The strength 
of the securit}^ in this case depends on the j^ropor- 
tion of specie to credit. When so-called "wild- 
cat" banks were started, with no capital except th$ 
notes of stockholders, and no specie, there was 
nothing but credit to sustain the circulation, and 
banks and circulation soon collapsed together. 

4. Credit currency. This consists of engraved 
notes, bearing promises of a government to pay 
specified sums of money. The Continental money 
of Revolutionary times, and the present United- 
States treasury-notes, are examples of this kind of 
paper-money. On the face of the greenback we 
read, "The United States will pay the bearer ten 
dollars." On its back we read, "This note is a legal 
tender at its par value for all debts, public and 
private, except duties on imports, and interest on 
the public debt." This engraved slip of paper is, 
then, only an evidence of debt. The legal tender 
clause on its back forces men to take it in payment 



190 POLITICAL ECONOMY. 

of goods. But as it passes from hand to hand it 
simply transfers debts : it cannot pay them. You 
owe your butcher ten dollars, and give him a green- 
back in pa^'ment. You are released thereby, but 
the government is now the debtor in j^our place. It 
is not itself, as a gold eagle would be, a quid pro 
quo for the butcher's meat : yet it will serve as a 
medium of exchange, while men have faith in the 
government. But let the suspicion arise that the 
government can not or will not fulfil its promise, and 
the purchasing powxr of these paper slips at once 
declines, and quickl}^ comes to nought, as did the 
Continental money and the paper money of the Con- 
federate States. 

5. Paper money secured by real estate. Such 
were the assignats of France. In the Revolution 
of 1789, large estates of the Church, and of wealthy 
nobles who had fled from the countr}^, were confis- 
cated, and made the basis of i)aper mone}', made up 
of promises of the government for a certain number 
of francs, each note being at the same time a cer- 
tificate of title to a certain amount of land of the 
same value. But the troublous times caused the 
value of lands to depreciate ; and, when the amount 
of assignats issued rose to more than forty-five 
billion francs, the promise and the assigned land* 
title became worthless. 

From this view of what paper money is, the fol- 
lowing statements are evidently true. They are 
also confirmed by actual experience. 

1. It is a very convenient instrument of exchange. 



PAPER MONEY. 191 

2. As respects its material it is economical; so 
far as it can safely be used in place of real mone^^, 
it sets free, for other uses, the more costly gold and 
silver. 

3 . It has in it always the element of credit. Even 
a gold-certificate is nothing to me except as I cred- 
it the statement that the treasurer holds the gold 
ready to pay it. The managers of the Bank of 
Amsterdam betrayed their trust ; and, as soon as 
the fact was known that the gold was gone from its 
vaults, its notes were good for nothing. 

4. While paper mone}' ma}' be a convenient me- 
dium of exchange, it can never serve as a standard 
of value. Its promise must be expressed in terms 
of real mone}', dollars ; and a dollar means a speci- 
fied number of grains of silver, a defined, substan- 
tial value. The paper note must crytj with it the 
vision and the hope of a silver dollar, at some time 
lo be realized, or it can have no purchasing power. 
tf our government should say, b}- word or act, that 
the actual redemption of its greenback promise is 
not to be expected, its treasuiy-notes would drop 
to the ground like autumn leaves, utterly worthless. 

5. Paper money can ordinarily circulate only in 
the country where it is issued. 

6. Paper money is itself liable to fluctuate in 
value. It will be always compared with gold ; and 
if, by increased issues, it is out of proportion to the 
standard, gold will be at a premium, which means 
always that paper is depreciated. 

7. By the expansion and contraction of its issues, 
paper money tends to keep the prices of all com- 
modities fluctuating. 



192 POLITICAL ECONOMY. 

8. Governments, whether republican or monar 
chical, when once the}" have begun to issue papei 
money, are under strong temptation to go on increas- 
ing its volume, till its redemption is impossible. It 

^is said that no paper money issued by a govern- 
'ment on its own credit alone has ever been re- 
deemed. It is to be hoped that our nation will 
prove an exception to this statement, and give to 
the world an example of truthfulness and honesty 
worthy to be imitated. 

9. A law, like our " legal- tender act,*' making the 
circulation of the government's paper money compul- 
sory, simply forces a loan from a people. In its 
exigency the United States wanted guns, ships, pro- 
visions, &c. It ordered them of the manufacturers, 
and paid in promises, which was, in effect, borrow- 
ing instead of purchasing. Then, to relieve the 
manufacturers, it passed a law compelling the people 
to take the promises, and so to carry the loan. 

10. The expansion and contraction of paper 
money disturbs all the functions of credit, and is 
to a great extent the real cause of commercial 
crises, panics, and hard times. 

11. The instabiht}^ of paper mone}^ tends to re^ 
solve all commercial transactions, and especially 
credit transactions, into games of chance, — losing 
games for the many. 

12. The promises of paper money unfulfilled tend 
to blunt and deaden the public conscience, and to 
demoralize a people. 

The upshot of all is, not that paper money is to 
be altogether banished, for that is impossible, but 



. PAPER MONEY. 193 

that its issue and its use must be carefully restricted 
b}^ all the appliances of wise legislation and sound 
public sentiment. 

EXERCISES. 

1. What inconveniences would be experienced in the 
business of a town of six thousand people without a bank ? 

2. How does a bank increase the capital of a com- 
munity ? 

3. Wliat benefit do farmers derive from banks ? 

4. If you have a doubtful coin, why do you take it to 
the bank to be tested ? 

5. What is the effect of a large shipment of grain front 
Chicago to New York on the premium charged in Chicago 
for New- York exchange ? 

6. What advantage is it to the owner of capital to loan 
his money through a bank ? 

T. What advantage is it to the borrower to get his loans 
from a bank ? 

8. Which involves the larger outlay for interest, a pri- 
vate loan for a year of $10,000, at eight per cent, or the 
same amount taken from the bank by discount, renewed 
every sixty days through the year ? Calculate the differ- 
ence. 

9. In what respects is our national-bank system more 
advantageous than the former system of State banks to the 
general business of the whole country ? 

10. Is it as profitable to the bankers ? 

11. In the bank-statements of liabilities and resources, 
which are the items, on either side, of chief consequence, 
as indicating the soundness of a bank ? 

12. Which are most important with reference to its 
profits ? 

13. What profit has a national bank from its circulating 
notes ? 

14. What embarrassment may they cause to the bank ? 

15. If another war should compel our government to 



194 POLITICAL ECONOMY. 

double the amount of its bonded debt, what would be th« 
effect on our national banks ? 

16. Explain the relation between sound and prosperous 
blinking, and the general prosperity of business. 

17. State in detail the conveniences of paper money. 

18. State in detail its evils or dangers. 

19. Which kind of paper money named in the text is 
safest ? 

20. Which involves the greatest risks ? 

21. What is the special danger of paper money issued by 
governments ? 

22. What caused the rapid advance in prices from 1863 to 
1870? 

23. How were the profits of business affected by that 
inflation ? 

24. Was the re-action from 1873 to 1879 avoidable ? Was 
it healtliful to business, though trying and painful ? 

25. If no attempt had been made to resume specie pay- 
ments, what miist have happened to our paper money? 
What to business generally ? 

26. Who get the advantage of fluctuations incident to 
the too free issue of paper money ? Who suffer most from 
its disastrous effect ? 

27. Read the story of the "Mississippi Scheme," and 
state John Law's fallacy. Is not the same fallacy involved 
in the reasoning of those who advocate the continued and 
unlimited issue of American paper money ? Are not like 
consequences probable ? 

28. What would be the effect of prohibiting the issue of 
circulating notes of less denomination than te dollars ? 
How is it in England and in France ? 



INTERNATIONAL TRADE. 195 



CHAPTER V. 

INTERNATIONAL TRADE. 

1 . The nations of men are of one blood, and con- 
stitute one family. 

2. All the face of the earth, with its great diver- 
sity of resources and productions, is given to the one 
human race. 

3. The blessings which the earth has to yield are 
developed in largest measure as the people of every 
land devote themselves to the production of those 
forms of wealth for which their country is best 
adapted. 

4. The happiest distribution of those blessings is 
secured by intercommunication and mutual ex- 
changes, made as free as possible between all 
nations. 

Accepting the first of these propositions as the 
teaching of Christianity, confirmed by reason and 
common sense, the other three embody the first 
principles of Political Economy in their broad ap- 
plication to the highest welfare of mankind. After 
the lapse of centuries, the world is now fast coming 
to act on the practical belief of these simple funda- 
mental truths. Within the last hundred 3'ears the 
discoveries of science and the activity of invention 
combined have astonished the world by the new 



196 POLITICAL ECONOMY. 

facilities furnished to give extension and freedom to 
the mutual intercourse and trade of nations. All 
civilized people hail with joy the beneficent changes 
which have come to each country and to the world 
by the introduction of steam to give speed and cer- 
tainty to navigation, of the locomotive and rail-car^ 
to shorten distance as measured by time, and of the^ 
electric telegraph, which annihilates time and dis- 
tance, and permits contracts and all commercial 
negotiations to be adjusted to present facts in all 
parts of the world. The common sense of men, 
expressed by their instinctive, prompt adoption of 
these inventions, pronounces universal freedom of 
trade a common blessing. In accord with this prin- 
ciple, the civilization of the world is advancing with 
rapid strides. 

Until a comparatively recent period there was 
nothing which could properly be called international 
trade. We do indeed read in historj-, as far back 
as its records go, of overland merchantmen, like the 
caravan of Ishmaelites to whom Joseph was sold ; 
of cities like Tjtc and Carthage, and some of the 
Greek cities, which grew rich and great by a sort 
of world-wide commerce ; and in the mediaeval time 
of the Italian cities, Venice, Genoa, and others, 
whose trade swept the seas, and brought in to indi- 
vidual merchants and to the coffers of the state 
wealth untold. But those merchant-caravans and 
fleets of commerce were mere go-betweens for peo- 
ples who stood aloof, in antagonism towards each 
other. These traders went everywhere, buying 
whatever they could at the cheapest, and selling 



INTERNATIONAL TRADE. 197 

what they could at the dearest, and took the chief 
advantage to themselves. They grew rich out of 
their contact with all, but thej' awakened no com- 
mon interests between the different peoples they 
visited. They left only the incidental benefit of 
furnishing each with some things they did want, and. 
carrjdng away some things they did not want. That 
trade fostered no international good-will, and gave 
rise to no free international intercourse. 

False doctrines then prevailed, as, that " Nations 
are natural enemies to each other ; " "In trade, one 
nation can gain only what another nation has lost ; '* 
*' A nation's wealth is increased onl}' as money is 
brought in and held fast ; " " Better to give two 
iloUars which remain in the country for a com- 
modit}', than onl}' one dollar which goes out of the 
country." These false doctrines led to the most 
harassing restrictions on all commercial intercourse. 
Different trades were organized as rival guilds, each 
guarding carefully its own secrets, and eager to 
secm'e special privileges. Tolls were collected at 
every city's gates on all goods brought in. Each 
nation sought to build up its own industr}^ by break- 
ing down that of others. Strange and absurd laws 
were enacted, defining what things the people should 
and what they should not consume, and resisting or 
distorting all the natural laws of trade. 

Happily, other and better views have now, in 
great measure, supplanted the old false doctrines, 
and the absurd regulations have for the most part 
disappeared from the statute-books. One theory, 
however, which originated in the mediaeval ideas 



198 POLITICAL ECONOMY. 

of feudal isolation, still lingers with tenacious hold 
on man}" nCiinds, and with power to sway the policy 
of states, our own free Repubhc especiall}^, against 
the principles of sound economy. It is that which 
is known as the theory of protection, carried out in 
the enactment of protective tariffs. The limits of 
this work do not admit of an extended discussion 
of this theory. We cannot, however, do less than 
to attempt a concise statement of the question as it 
now agitates the public mind, in the light of those 
first principles of our science which we have been 
studying. 

The Theory of Protection distinctly stated is^ 
that, in order to promote home industry, the im» 
portation of certain articles, from countries where 
they can he produced cheaper than at home, should 
be prohibited or restricted hy heavy duties. 

In direct opposition to this, — 

The Theory of Free Trade affirms that a na- 
tion's wealth and prosperity are best promoted by 
maintaining the utmost freedom for the exchange 
of all commodities among its ovrn people, and with 
the people of other countries. 

The mere statement of the X3rinciples suggests two 
conflicting economic S3^stems. In practical legisla- 
tion two corresponding policies have been in conflict 
through all the history of our nation. There seema 
no place for compromise : truth and wisdom must lift 
on one side or the other. 

In the discussion of each department of our sci- 
ence, freedom appears as the natural law of industry 



INTERNATIONAL TRADE. 199 

and trade. But on the face of it the theory of pro- 
tection involves an interference with freedom ; ao 
interference which affects all of the four depan- 
ments, — production, consumption, distribution, and 
exchange, though applied most directly to the last- 
named. Is it not plain, then, that the presumption 
is against the theory, that the burden of proof is 
laid over upon its advocates? What are the argu- 
ments urged to sustain it? We can notice only the 
three most important and plausible. It is said, — 

1 . Protectien is necessary to secure that variety of 
industry and that balance of diflferent industries 
■which are esoential to a people's prosperity. This 
is the broad proposition which underlies and in- 
cludes all arguments for the system. In form the 
argument is logical. It gives for a major premise 
the affirmation that a varied and balanced industry 
is essential to a people's prosperity. The minor 
premise is that protection is a. necessary means to 
varied and balanced industry. If the premises are 
admitted, the conclusion is sound : a protective pol- 
ic}' must favor a people's prosperit3\ 

The truth of the major premise cannot be ques- 
tioned. On the other hand, it is worth}^ to be pre- 
sented in full force, resolved into several particulars, 
as a kind of summar}- of economic principles. 

a. Every countr}' has a great variety of resources, 
and the development of all its resources conduces to 
its greatest wealth. 

6. Among the population of every country there 
Is a corresponding diversity of native talent, and 



200 POLITICAL ECONOMY. 

labor is most effective when every one has scope foi 
doing that for which he is best fitted. 

C. The actual wants of men are equally diverse, 

and the highest happiness of a people depends on 
the degree in which these varied wants are provided 
for. 

d. A diversit}^ of occupations makes a liome-mar- 
ket for all sorts of products, saving cost of trans- 
portation, favoring division of labor, and binding aU 
classes together by ties of mutual helpfulness and 
common interests. 

e. Varied industry favors the social and moral ad- 
vancement of a people, quickening and broadening 
jninds, enlarging hearts, and impelling to noblest 
action in the lines of rectitude and benevolence. 

These statements will be readil}" accepted b}" all 
candid minds. As bearing on the question under 
consideration, they need but a single qualification. 
It does not follow that a people must hasten hy all 
means to develop ever}^ source of wealth existing 
among them, or maintain at all hazards every pos- 
sible form of industry. The people of Barbadoes 
have ample facilities for raising table-vegetables, 
but they have greater advantages for raising sugar. 
Hence it maj'^ be good polic}^ for them to produce 
mainly sugar, and get the other provisions from 
other countries, where the cost of raising them is 
greater, perhaps, than it would be on their own soil. 
Many such cases do exist, but they are exceptions 
which prove the rule. 

The real issue is joined on the second or minor 
premise, — protection is necessary to secure diversi« 



INTERNATIONAL TRADE. 201 

fled industry. This i^roposition is met by a flat 
denial, and the positive affirmation that there is a 
better and surer Tvay of reaching that result. Where 
no interference or obstruction is allowed, there comes 
a spontaneous development which is safe and con- 
stant, because it is in accordance with nature's law. 
This thought may be unfolded in a few distinct, yet 
connected, propositions. 

a. There is a natural gro^vth of human industry, 
the laws of which are as fixed and certain as those 
which pertain to the growth of a tree. 

b. Free competition is the healthy stimulus to that 
growth. 

c. Under the natural law of development, industry 
will be applied to the several native resources of 3 
countr}' as fast as the increase of labor and capital 
will Avarrant. 

d. Men's instinct for accumulation, following di- 
verse individual capacities, tastes, and predilections, 
is the safest guide to determine the order in which 
labor and capital shall be applied to those various 
resources. Under it, whatever promises a profit will 
be undertaken as soon as it can be without sacrifi- 
cing a greater profit elsew^here. 

e. The attempt to force labor and capital into 
certain employments before their time deranges th^ 
order of nature, and produces re-actions which hinder 
the desired result. 

/. At any stage of this development, if exchange 
is free, foreign products are purchased w^ith the fruits 
of a people's most effective labor, that is, with those 
articles which they can then produce to the best 



202 POLITICAL ECONOMY. 

advantage ; which the}- can best afford to part with, 
because they are obtained at the least cost. By all 
such advantageous trade, capital, the prime element 
of varied industrj^, is increased, and labor is sus- 
tained. 

g. When, b}^ this natural progress, a people come 
to take up a new industr}^ for which they have nat- 
ural advantages and God-given capacit3^,.no foreign 
competition can crush it ; for, even in its infancy, it 
is charged with the nation's life and strength. 

h. An industry which is not indigenous, which 
has no natural advantages, or which is prematurely 
set up and fostered by artificial means, can have 
only a sickly, uncertain life, and is supported at a 
wasteful expenditure of a nation's resources. 

The strong reason urged on the other side to prove 
ihat protection is necessary is thus presented : — 

*' Foreign competition crushes out the home pro- 
duction of all but the rudest and coarsest articles 
of inanufacture, and prevents the estabhshment of 
a varied industry, unless the government interfere, 
as the personification of the nation and its co-ordi- 
nating power, to restore the equilibrium by discour- 
aging imports." 

If the question is raised, how foreign competition 
is able to do this, the answer must be that the for- 
eign countr}' has either superior natural resources, 
or more abundant capital, or laborers in greater 
numbers, and better skilled for the work to be done, 
or possibly all these advantages combined. If this 
be so, it ma}^ be asked again, how can government 
interference, discouraging imports, counterbalance 



INTERNATIONAL TRADE. 203 

these advantages? It is quite evident that protec- 
tion cannot add to the natural resources of a coun- 
try. It can never give to France the coal-fields of 
England, nor bring to the prairies of Illinois the 
water-powers of New England, nor secure to Ger- 
man}' the cotton-raising facilities of our Southern 
States. Obviously a protective tariff cannot create 
capital. Capital springs and grows only by industry 
and frugality. It is the fruit of saving. And cer- 
tainly legislation has no power to create men, or 
endow them with skill. Population increases both 
by births and b}' immigration, according to the 
abundance of the necessaries of life which are fur- 
nished ; and a people gi'ow in skill as they grow in 
intelligence, and bring their faculties into active 
exercise. 

All that protection can do is to concentrate capi- 
tal and labor on one emploj'ment, and for this it 
lays a special burden on all others for the benefit 
of the favored occupation. The advocates of this 
policy keep out of sight the fact that it can do noth- 
ing more than to change the direction of capital and 
labor, and that the duty is a tax laid upon the many 
for the benefit of a few. When articles of foreign 
production are imported, the}^ are to be paid for b}- 
the products of home-labor and capital ; and the 
question of economy is. Which is the cheapest? 
Which will bring the largest returns for a certain 
amount of labor, — to make these articles ourselves, 
or to make something else with which to bu}- them? 
Left free from government interference, home labor 
and capital will lay hold of whatever natural re* 



204 POLITICAL ECONOMY. 

sources a country possesses, and, with reference to 
both home wants and foreign wants, produce the 
things most feasible and desu'able at the cheapest 
possible rates. The surplus of these products will 
pay for the foreign goods. Capital will be increased 
by both the productive industry and the trade ; and, 
as a people grow strong in capital and in men, it i« 
not possible for foreign competition to restrict theii 
industrj^, or to prevent their 'taking up all the variety 
of industry which their needs require, anj the facili* 
ties of their country favor. Competition, free an(i 
fair, is ever the strongest and healthiest stimulua 
of both productive industry and wide -spread active 
trade. 

2. It is strongly urged that p^otMion is a necea 
sary means of maintaining national independence^ 

This is a specious argument, because the phrase 
*' national independence" has a patriotic ring, to 
which the popular ear and tho popular heart are 
peculiarly sensitive. But, as it stands in the propo- 
sition before us, it simply covers a subtle sophistry. 
For individuals and for nations there are two 
kinds of independence. One may withdraw from 
his fellow-men to a cave in the wilderness, and thus 
keep himself alive, and possibly find interest and 
enjoyment in a hermit-life. He may glory in his 
independence. But is there any thing noble in such 
isolation? Is it the way for a man to make the 
most of himself? The independence of genuine 
manhood is of another sort. It is individuality of 
capacities, acquisitions, and diark^cter, which is able 



rNTERlSTATIONAL TRADE. 205 

to stand on its own basis in full and free relations 
with fellow-men. It is, in the midst of society, a 
distinct personalit}', giving and receiving, support- 
ing and supported, blessing and blessed, through 
ihe varied intercoui'se which nature prompts, and by 
which the completest development of the man and 
of the race is advanced. So of nations, there is an 
independence of isolation, such as China and Japan 
until recently maintained. But that independence 
which is the strength and glory of a nation is of 
another kind. It is an individuality of national 
resources and character which stands up in the full 
brotherhood of nations, and in the consciousness of 
its own strength enters into aU offices of mutual 
dependence through which nations grow, and civili- 
zation makes progress. 

The policy of protection fosters the narrower kind 
of independence. It is a restrictive policy. Canied 
out to its logical conclusion, it leads to isolation. 
The sophistry referred to consists in the conceal- 
ment of this fact. Mobile the term "national inde- 
pendence " is put forth in its broader, nobler sense. 

In an economic point of view, the real independ- 
ence of a nation is commercial independence. That 
means, not that it does not need or will not have the 
productions of other nations, but that it is able to 
command them. The basis of such independence 
is the home-production of wealth. The way to 
increase wealth is to use to the best j^ossible advan- 
tage the gifts of natm'e, and then, in the world's 
great mart, sell where things can be sold on the 
best terms, and buy where things can be bought on 



206 POLITICAL ECONOMY. 

the best ten as. The nation is strongest and mosl 
complete in Jier independence, which can open most 
freely every avenue for the wealth of the world to 
flow in upoii her, because, as the fruit of her own 
vital energies, freely exerted, she has wealth in 
abundance tf) give a fair equivalent. 

A nation comes to this full maturit}^ by a steady 
aatural growth, just as a Child comes to full man- 
hood. In both cases freedom is the law of growth. 
Fair competition helps a nation's growth both in 
general wealth and in particular industries, just as 
the wrestling; of a boy with one older and stronger 
than himself helps to develop in him particular 
muscles, and. the pluck and vigor of a whole man- 
hood. Whea at times worsted and thrown, the 
boy may rise and say, ." You beat me now, but I 
don't give up the contest. Let me get m}^ growth, 
and I'll sho IV 3^ou what I can do." The eflbrt by 
protection to hasten a nation's independence is like 
binding an infant's limbs in splints, that he may 
sooner stand alone. The artificial appliance may 
develop prematurely a single function, but it is at a 
wasteful expense of general vigor, and is quite sure 
to induce chronic weakness and deformity. 

3. The advantages of a home market for agri- 
cultural products are often urged in favor of the 
protective system. It is certainly an advantage to 
a farmer to find, in a manufacturing village near, a 
market for his produce. But, if this market is made 
and sustained for him by a protective tariff, he must 
pay for tools, for salt, for dry-goods, for many of 



INTERNATIONAL TRADE. 207 

the manufactured articles he needs, from twenty- to 
fift}' per cent more than the}^ would cost under the 
rule of free trade. This adds to the cost of pro* 
ducing his crops, and offsets what he may save in 
the expense of transportation to the distant conv 
mercial city. 

But here, as in the first case, we take issue directly 
on the main point. The assumption that protection 
creates the home-market is a fallacy. These centers 
of varied indastr}^ grow up naturall}' and healthily 
with the increase of population and wealth. Me- 
chanical genius, the investigating turn of mind, the 
energy of will-power, managing capacitj', — these 
qualities come not of protective tariffs. The}' are 
the gifts of God to men. Left to themselves, and 
stimulated by competition, the}' spontaneousl}- la}'' 
hold on all gifts of God in nature, and, using all 
available capital, set up the workshops of industry, 
wherever best opportunities are presented. 

Furthermore, the term " home market," in this 
discussion, has force only as it implies the produc- 
tion at home of all manufactures wanted, and the 
consumption at home of all agricultural produce 
raised, — a condition of things attainable, if at all, 
only after the lapse of centuries. Meantime a 
people must buy the things they cannot produce, 
by selling the surplus of that which they can pro- 
duce. For a long time to come this country will 
have a large surplus of breadstuffs, cotton, petro- 
leum, silver and gold, to dispose of. We can sell to 
others only as we give others a fair chance to sell 
to us. Domestic commerce and foreign commerce 



208 POLITICAL ECONOMY. 

are necessarily interlocked. The prices of agricul 
tural products in our home markets are determined 
by the prices in markets abroad. Where trade ia 
freest, the prices will, on the average, be the best. 
Hence free trade is the essential condition of a 
sound and healthy home market. Of all classes, 
those devoted to agriculture bear the heaviest share 
of the burden laid by the protective tariff, while 
they reap no direct benefit from it. 

There are positive objections to the system of 
protection, which may be concisely stated as fol- 
lows : — 

1. Protection introduces and fosters antagonism 
between the different industries of a country. The 
idea of giving protect? on to every branch of indus- 
try is absurd. The theory' implies special encour- 
agement to certain manufactures by taxing all othei 
interests in their behalf. The duty which protects the 
woolen-manufacture increases the cost of the wool- 
grower's clothing, while the competition of cheap 
wools from abroad keeps down the price of his 
product. A tariff on the foreign wools will enhance 
the cost of material to the manufacturer. So two 
parties whose interests are really one are set against 
each other. 

2. The unnatural stimulus given by protective 
legislation leads to over-production, and consequent 
stagnation and failure. The first effect of a high 
dut}^ is to raise prices, and increase the profits of 
the protected industrj^ This causes a rush into that 
branch of production, till it is quickly overdone, and 
a disastrous re-action comes. 



INTERNATIONAL TRADE. 209 

S. Protection diminishes the legitimate revenues 
of the state, at the same time that it lays a heavy 
tax on the people. Just SO fill" as the tariff is pro- 
tective in its operation, it reduces tlie imposts from 
wliicli tlie government gets its income ; yet, just so 
far as prices of the protected article in the market 
are enhanced b}^ the tariff, all consumers pay a 
special tax for the benefit of the favored producer. 

4. In its application, the policy of protection must 
be unstable, disturbing the course of industry by 
frequent changes. This follows inevitably from the 
conflict of interests just referred to. When the 
iluty on iron is high, all who use iron as the mate- 
rial of their industr}' clamor against it. So new 
candidates for the special favor press their stiit for 
a change of the tariff in their interest. With every 
session of Congress movements are made for some 
change of the tariff. A protective tariff can never 
be made fair and equal to all ; for its fundamental 
principle is an unjust favoritism, against which those 
not favored instinctivelj' protest and contend. 

5. Protection tends to demoralize ovir national 
legislation. The lobby of the Capitol is thronged 
with representatives of certain manufactures, seek- 
ing to obtain or to perpetuate special protection. 
Money is freely used, and bargains are made to 
combine the friends of separate measures, when 
votes are given. Proposed acts come thus to be 
judged of not by their real merits, but by their 
relation to personal interests. 

6. Protection tends to corrupt the public morals 
and the public service. It offers strong temptations 



210 POLITICAL ECONOMY. 

to the violation of law by smuggling. The resist- 
ance of men's consciences to this temptation is 
slight, because the tariff-law rests on no gi'ound of 
absolute right. The nice sense of honor and right 
is deadened ; and the making of false invoices, the 
swearing of false oaths, and direct briber}^ at the 
custom-house, are regarded as venial sins. Officials 
of the government come into collusion and partner- 
ship with these crimes, and betraj^ the sacred pubhc 
trusts with which they are charged. 

Until within the last half-century, the protective 
policy has ruled the industry and trade of the world, 
with only here and there an exception, like Holland 
in her best days. Free trade has had scarcely' a 
chance to try its experiment. Its principles are, 
hoTrever, illustrated and sustained in the hundred 
years' history of our nation's independent life. Thft 
States of our republic, in their extent of territory, 
their diversity of resources, the varied races and 
endowments of their people, and their distinctive 
interests, constitute a world by themselves. For- 
tunately our Constitution forever forbids the pro- 
tective policy to restrict their trade with each other. 
Here is a broad arena for the experiment of free 
trade. For nearl}' fort}^ 3'ears the writer has watched 
the course of that experiment in the unfolding 
growth of a 3'Oung Western State. Her chief in- 
dustry was at the first, and must long continue to 
be, agriculture. But as population poured into the 
prairies and groves, and agriculture 3"! elded a sur- 
plus of home capital, and a basis of credit was laid 



rNTERNATIO]S"AL TRADE. 211 

for the introduction of Eastern capital, every kind 
of industry suited to her climate and conditions haa 
been successful!}' established. Her mines have been 
worked, her water-powers have been utilized, villages 
and cities have sprung up suddenly, and the diverse 
genius and taste of her sons have found ample scope 
and stimulus for profitable exercise. According to 
the theor}^ of protection, the competition of New- 
England manufactures, brought in fieely by the 
best facilities for cheap and rapid transportation, 
should have ' ' crushed out the home production of 
all but the rudest and coarsest articles of manufac- 
ture." But the facts are all against the theory 
Woolen-factories, cotton-factories, shoe-factories, 
iron-works, machine-shops, paper-mills, establish* 
ments for making agricultural implements, all havo 
been set up and carried on with a success that 
promises to be abiding and expanding. This result 
of a brief but fair experiment of the principle of 
free trade confirms ever}' phase of that doctrine, 
and shows that what is philosophically sound and 
true is also practically safe and wise. 

The Golden Rule of Christ is full of wisdom and 
righteousness in its application to the intercourse of 
nations. We cherish the fond hope that the day 
is not distant when the nations will conform their 
policies to the rule, and " do each to others as they 
would have others do to them." Then the theory 
of protection, with its false ideas of antagonism and 
selfish isolation, will have no place ; but, instead, 
the brotherhood of nations as well as of individual 



212 POLITICAL ECONOMY. 

men will be recognized, and the broad philanthropy 
which Christianity inculcates, and aims to make uni- 
versal, will have free scope to work out the world's 
emancipation from all wrong and evil. In such a 
state the first principles of sound Pohtical Economy 
will find their consummate application. 

EXERCISES. 

1. lUustrate the effects of steam applied to navigation 
on the commerce of the world. 

2. What benefits have accrued therefrom ? 

3. What effect had the opening of the Erie Canal on the 
condition of the early settlers of Western ISTew York, as 
respects the wheat they raised ? as respects the goods they 
needed ? 

4. Did that improvement help, or hinder, the increase 
j>f their wealth ? Did it hasten, or delay, the introduction of 
laanuf actures in the region ? 

5. If it is expedient to restrict the importation of goods 
from abroad, why should so much expense be laid out in 
removing obstructions to free communication ? 

6. How is the department of production affected by the 
policy of protection ? 

7. How does it affect consumption ? 

8. How does it affect distribution ? 

9. How does it affect exchange ? 

10. Explain the difference between a revenue tariff and 
& protective tariff. 

11. Show how a tariff of forty per cent on iron will tax 
the farmers. 

12. Will such a tariff yield much revenue to the govern- 
jnent ? Who gets the benefit of the tax ? 

13. How and when is it expected that the farmers will 
|et an indirect benefit from the tariff ? 

14. If a farmer can buy a suit made in England for tea 
iushels of wheat, is there any justice in compelling him td 
pay fifteen bushels for a suit of American manufacture ? 



INTERNATIONAL TRADE. 218 

i5. If the tariff excludes a great part of English mana* 
actures, can we expect the English to buy freely our corn 
aud pork f If we expect to sell to a foreign country, musfe 
we not also buy of them ? 

IG. If capital is accumulated by agricultural industry, 
and labor grows abundant, is any artificial means needed 
to turn it to the setting-up of manufactures ? 

17. While capital and labor applied to farming are yield- 
ing satisfactory returns, is it expedient to turn them to 
some other employment not so profitable f 

18. Is Robinson Crusoe's independence a thing to be 
desired ? 

19. Does Chinese isolation, as it was, meet your ideal of 
national prosperity? 

20. Explain how a high tariff tends to over-production in 
the industries protected ? 

21. Why might not a tariff be adjusted to favor all 
branches of industry alike ? 

22. Can you tell any thing about corruption in the 
eustom-house in New York H 

23. How would a low rate of duties, uniform on all im- 
ported goods, relieve that corruption ? 

24. Has any protective tariff in our country been allowed 
to continue long without changes ? 

25. Can you tell how the iron interest in our country hM 
been affected by such frequent changes of the tariff f 



